IBM's Q3 disappoints, stock drops

SAN FRANCISCO Mon Oct 17, 2011 7:30pm EDT

A man walks past the headquarters of IBM Japan in Tokyo March 18, 2010.  REUTERS/Toru Hanai

A man walks past the headquarters of IBM Japan in Tokyo March 18, 2010.

Credit: Reuters/Toru Hanai

SAN FRANCISCO (Reuters) - IBM's quarterly results failed to impress investors used to a stellar showing from Big Blue, dragging its stock down more than 3 percent.

Revenue and service signings roughly met forecasts, but paled in comparison with strong results in recent weeks from Oracle Corp and Accenture Plc that had fueled an IBM stock rally to an all-time high on Friday.

The information technology hardware bellwether, with its global span and diverse clientele, said total services signings -- an indicator of future growth -- climbed to $12.3 billion in the third quarter, at the low end of expectations of $12 billion to $13 billion.

Revenue rose 8 percent to $26.2 billion, marginally softer than the average forecast of $26.26 billion.

"We're in the early stages of third-quarter earnings season and everyone's looking at top-line numbers to see any evidence of the economic slowdown working its way into financial results," said Keith Wirtz, chief investment officer for Fifth Third Asset Management.

"All the news on macro has been negative. At what point does it creep into the company numbers? We're still seeing above-average results."

Buttressed by recurring revenue that helps keep IBM's results steady in strong and weak economies, its shares have outperformed the market and hit a record high last week. They are up about 28 percent this year versus the Standard & Poor's 500 index's 4 percent dip.

International Business Machines Corp's results on Monday triggered profit-taking. The stock, which closed at an all-time high of $190.53 on Friday, fell 3.7 percent to $179.70 in extended trade after closing down 2.1 percent on the New York Stock Exchange.

"The company exceeded published expectations, but the underlying expectations were even higher," Annex Research analyst Bob Djurdjevic said. "Investors who have been very bullish on IBM are probably taking some profits now."

RISING CLOUD

U.S. economic concerns and a worsening European financial crisis have hurt consumer demand. Companies such as IBM that sell hardware and software for data centers powering the Internet have remained resilient.

IBM said revenue from cloud computing in the first nine months of this year was twice as much as in full-year 2010.

Business software maker VMware Inc, also a major player in cloud computing, on Monday posted quarterly profit above expectations but warned of uncertainty among some of its corporate customers in Europe.

"We have seen a bit more scrutiny and higher levels of approval required. Particularly with larger deals where they would go for CFO and CEO approval, where in the past we may not have seen those approvals to be necessary," said VMWare Chief Financial Officer Mark Peeking.

IBM also derives a major portion of its revenue from government spending and the financial services industry -- both hit hard by widening fiscal deficits and crumbling markets, respectively.

"There isn't much happiness with these numbers. The software number is up 13 percent, but adjusted for currency, it was up 8 percent. That's a little disappointing," said Richard Sichel, chief investment officer for Philadelphia Trust Co.

IBM has consistently beaten Wall Street forecasts. In the second quarter, it trounced expectations with signings of new business surging 16 percent. At the time, that stellar performance raised hopes that 2011 would be a good year for overall tech-spending.

On Monday, it raised its full-year diluted earnings forecast to at least $13.35 per share, from its prior estimate of at least $13.25. But that was just pennies above the Wall Street target of $13.32, according to Thomson Reuters I/B/E/S.

IBM reported a third-quarter profit, excluding items, of $3.28 per share, up 15 percent year over year, just pennies above expectations for $3.22.

"Whatever IBM could control, they did a great job. But they are not immune to macro conditions. Financial conditions are tough," said Global Equities Research analyst Trip Chowdhry.

"People don't want to cancel projects, but projects are getting delayed. Sales cycles are getting elongated. New projects are getting smaller budgets."

Despite uncertainty in the fourth quarter and 2012, some portfolio managers remained confident in IBM's ability to weather a tougher global environment.

"IBM's business has a degree of resiliency to it. The company has maintenance agreements that generate recurring revenue, giving us more visibility on future results," Wirtz said.

(Reporting by Noel Randewich; Editing by Richard Chang)

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