IBM raises earnings outlook despite weak tech spending

NEW YORK/BOSTON Wed Jul 18, 2012 8:25pm EDT

A worker is pictured behind a logo at the IBM stand on the CeBIT computer fair in Hanover February 26, 2011. REUTERS/Tobias Schwarz

A worker is pictured behind a logo at the IBM stand on the CeBIT computer fair in Hanover February 26, 2011.

Credit: Reuters/Tobias Schwarz

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NEW YORK/BOSTON (Reuters) - IBM (IBM.N) raised its full-year earnings target, even as it posted a quarterly revenue shortfall, reflecting its ability to manage costs as global technology spending sputters.

International Business Machines Corp, a bellwether for the IT industry because of its global span and breadth of businesses, now expects full-year earnings per share - excluding items - of at least $15.10, versus at least $15.00 previously.

Unlike other companies, IBM said it had seen a strong June and Chief Financial Officer Mark Loughridge said he was "pretty confident going into the next quarter."

Smaller companies such as Informatica (INFA.O) said earlier this month conditions "dramatically" worsened in June with customers scrutinizing deals more closely and possibly signaling a broader pullback in tech spending [ID:nL3E8I62XC] [ID:nL2E8IB0GR].

Despite Loughridge's confidence, IBM -- like rivals Hewlett-Packard Co (HPQ.N) and Oracle Corp ORCL.O -- continues to grapple with declining corporate budgets as the European crisis tightens spending and emerging market growth decelerates.

The company known as Big Blue has been compensating by shifting its focus from hardware to higher-margin services and software over the past decade but software revenue was flat in the quarter and services was down 2 percent.

IBM said on Wednesday its revenue fell 3 percent to $25.8 billion in the quarter, missing average expectations of $26.27 billion. It said it took a $1 billion hit because of a weaker euro and other foreign exchange headwinds that translate into fewer dollars.

IBM generates about 60 percent of its revenue outside the U.S. While revenue in the Americas declined by only 1 percent, the drop in Europe, Middle East and Africa was 9 percent. The Asia-Pacific region grew a mere 2 percent.

Loughridge told analysts on a conference call after IBM reported earnings that the company foresaw a $2 billion hit from foreign currency factors in the second half.

Other companies that have a similar global reach will grapple with currency effects as well, said Andrew Bartels, analyst at research firm Forrester.

Some analysts expressed confidence that IBM would continue to manage any impact on revenue.

"I am not concerned about revenue growth," said Toni Sacconaghi, an analyst at Sanford Bernstein & Co, citing "IBM's ability to deliver against its EPS objectives, especially given the significant cost reductions the company is taking this year."

Others said that while they appreciated the raised earnings targets, revenue growth would be appreciated as well.

Richard Sichel, chief investment officer for Philadelphia Trust Co, said it was encouraging to see IBM raising its profit forecast after a string of recent earnings disappointments by other technology firms. But he said investors also wanted to see sales rise.

"You want to see earnings grow by top-line growth and not by cutbacks and buybacks and that sort of thing," he said.

IBM said second-quarter earnings per share, excluding items, was $3.51, beating average analysts' estimate of $3.43.

A number of companies such as Cisco Systems Inc (CSCO.O) have cautioned that tech spending may slow down in the second half of 2012 and companies such as Advanced Micro Devices Inc (AMD.N) have warned that earnings would suffer.

IBM shares rose 2.5 percent to $193 in extended trade, from their New York Stock Exchange close of $188.25.

The stock has fallen 11 percent in the three months since it reported a quarterly revenue shortfall when it last released earnings.

Those results raised concerns among some investors that the stock had gotten ahead of itself after hitting a record high of $210.69 on April 3. The broader Nasdaq composite index .IXIC has fallen 4 percent over the past three months.

"The big message is they beat EPS handily and they're raising the full-year EPS target, and that's probably enough for the stock to keep working," said RBC Capital Markets analyst Amit Daryanani. "It's a sign that this company can keep executing despite the revenue headwinds they have."

(Reporting by Nicola Leske; Additional reporting by Jim Finkle; Editing by Richard Chang and Phil Berlowitz)

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Comments (4)
Randy549 wrote:
IBM can’t keep growing profits unless they can start growing revenues; gravity cannot be defied forever and expenses cannot be cut forever (and of course, at some point excessive expense cutting starts impacting future revenue).

Jul 18, 2012 8:58pm EDT  --  Report as abuse
ProfRipster wrote:
–> ‘”I am not concerned about revenue growth,” said Toni Sacconaghi, an analyst at Sanford Bernstein & Co, citing “IBM’s ability to deliver against its EPS objectives, especially given the significant cost reductions the company is taking this year.”‘

What are the “significant cost reductions” IBM is taking this year? Is this referencing something specific? Or just ordinary cost control measures that all companies take nowadays? Anyone know?

Jul 18, 2012 9:24pm EDT  --  Report as abuse
ProfRipster wrote:
Randy549, I agree with you but this has been the IBM story for most quarters over the last 5 years at least. IBM is big–it has big revenues and big costs, so I guess investors think there is still enough bloat to continue the “anti-gravity” act further, pushing up the stock and holding it near its 100-year high. No one knows exactly how much longer it can continue–without revenue growth–before the inevitable happens that you point towards. But with all the cost cuts that have made the company successful for years without all that much growth, some we know about, others we assume, it makes me ask again, what is the big specific measure being taken this year that is alluded to in this article? I am not aware of any announced divestiture, layoff, etc. Does this guy know something more? Or did I just miss something? Or am I reading too much into a flippant quote? Anyone know anything about this?

Jul 18, 2012 11:15pm EDT  --  Report as abuse
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