IBM issues strong 2008 profit outlook

By Philipp Gollner

SAN FRANCISCO (Reuters) - IBM (IBM.N) on Thursday forecast 2008 earnings well ahead of Wall Street expectations as strong growth abroad made up for weaker results in the United States, sending its shares up 5 percent.

"This confirms the company's belief that the strength in their international operations will offset any domestic slowdown," said Daniel Genter, president and chief investment officer at RNC Genter Capital Management.

The world's largest computer services company forecast 2008 earnings would rise 15 percent to 16 percent, hitting $8.20 to $8.30 per share, while Wall Street analysts had expected $7.91 on average, according to Reuters Estimates.

International Business Machines Corp's optimism comes amid widespread fears that a weakening U.S. economy will cut into corporate earnings in technology and beyond, which were fanned this week by a disappointing forecast from microchip maker Intel Corp (INTC.O).

"We have an uncertain economic environment that we are working through along with the rest of the business world," IBM Chief Financial Officer Mark Loughridge said on a conference call.

IBM's yearly revenue would slip by about $100 million if it suffered a 10 percent decline in revenue from U.S. financial services customers, who account for about 7 percent of total revenue. "That is certainly within the scope of what we could handle as a general base of doing business," he said.

Loughridge added that IBM had a strong technology services business, accounting for more than half of revenue, and a recurring revenue base that would help it in uncertain times.

"International is absolutely the saving grace of these guys," said Peter Misek, an analyst at Canaccord Adams. "Right now I would not want to be a big tech company that was exposed to the U.S. consumer or heavily exposed to U.S. enterprises."

After a strong preliminary earnings report earlier in the week, IBM said fourth-quarter net income rose to $3.95 billion, or $2.80 per share, from $3.46 billion, or $2.31 per share, a year ago. Revenue grew to $28.9 billion from $26.3 billion.

Revenue from the Americas rose 5 percent, versus strong gains in other regions, but computer hardware sales declined.

Revenue from Europe, the Middle East and Africa jumped 16 percent to $10.8 billion, with 10 points of the increase coming from currency-related gains as the dollar weakened. The Asia-Pacific region's revenue rose 15 percent to $5.5 billion.

IBM said in preliminary results on Monday that earnings per share from continuing operations had jumped above analysts' average expectations, driven by strength in Asia, Europe and emerging countries. IBM said it was on track to reach its 2010 growth target, which calls for earnings per share of $11.

Total revenue from its global services business rose 17 percent. Business services, focused on consulting, had a revenue gain of 17 percent to $4.93 billion, and revenue from technology services, which includes outsourcing and computer maintenance, advanced 16 percent to $10 billion.

Software revenue rose 12 percent to $6.26 billion, and the unit's gross profit margin improved to 87.1 percent from 86.5 percent. Revenue from computer hardware, including server computers, data storage gear and microchips, fell 3.9 percent to $6.8 billion as customers delayed purchases of IBM mainframe computers until new models arrive in February.

The Monday pre-announcement sent IBM stock sharply higher and eased concerns for technology, until recently a safe haven for investors fleeing housing, banking and consumer-discretionary stocks.