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IBM profit tops targets, forecast up

BOSTON (Reuters) - IBM IBM.N reported a 22 percent rise in quarterly profit, blowing past Wall Street targets and raising its 2008 forecast, as emerging markets used its services, software and equipment to expand, and larger countries turned to technology to save money.

A view of IBM headquarters at la Defense in Paris, May 6, 2005. REUTERS/Philippe Wojazer

IBM posted a 12 percent rise in service contract signings, a business in which it leads the world, and said major Western countries were buying technology to reduce costs, as well as manage risks and compliance.

The results were much sunnier than those posted by Google Inc GOOG.O and Microsoft Corp MSFT.O, which both missed analysts' targets, with the software maker citing a tough U.S. economy and Google blaming lower returns managing its cash.

IBM Chief Financial Officer Mark Loughridge told a conference call that U.S. revenue grew 5 percent in the quarter, the weak dollar helped IBM and that currency hedges would help it mitigate any strengthening of the dollar next year. It was difficult not to say IBM was ahead on reaching its 2010 profit target, he concluded.

The company is widely seen as a defensive play for investors in a troubled market.

“Once again pretty impressive,” said Zach Rosenstock, an analyst at Wayne Hummer Wealth Management. “They’re focusing outside the U.S. to ride through the domestic downturn.”

International Business Machines Corp said second-quarter net income rose to $2.77 billion, or $1.98 per share, from $2.26 billion, or $1.55 per share, a year earlier.

Revenue rose 13 percent to $26.8 billion. Currency gains added 7 percentage points to the growth rate, IBM said.

Analysts, on average, expected profit of $1.82 per share and revenue of $25.92 billion, according to Reuters Estimates.

But shares sagged slightly in after-hours trading.

“The Google number may cast a shadow on this stock,” Fifth Third Asset Management Chief Investment Officer Keith Wirtz said.

IBM raised its 2008 earnings per share forecast to at least $8.75 from a previous outlook of at least $8.50 a share, taking it ahead of the Wall Street average view of $8.54 per share.

BUYER CONFIDENCE

Armonk, New York-based IBM gets about two-thirds of its revenue from outside the United States. Recurring revenue from services and software contracts accounts for about half its business, providing a buffer from sharp turns in the economy.

New signings in the quarter rose 12 percent to $14.7 billion. Loughridge said in an interview that he expects them to grow at a similar rate in the third quarter.

He also said that corporate scrutiny of purchases has not increased over the past six months.

“Did we see in the second half of 2007 a lengthening of the approval process, more layers of approval? Sure we did,” he said. “Do I think that’s gotten to be more restrictive as we have gone through the first and second quarter? I don’t think so.”

Revenue from IBM’s Global Technology Services business - which includes outsourcing, security and maintenance - rose 15 percent to $10.1 billion. Revenue at IBM’s Global Business Services, which does consulting and software development, rose 18 percent to $5.1 billion.

Daniel Genter, chief investment officer of RNC Genter Capital Management, said that strong services growth showed IBM’s customers are relatively confident about the economic outlook because they are willing to make new investments in technology.

“What we are seeing is that they are not cutting back on IT spending,” said Genter, whose firm holds about 500,000 IBM shares and manages a $2.8 billion portfolio.

The Armonk, New York-based company’s sluggish hardware business got a boost thanks to the February launch of a new line of mainframe computers, its first upgrade in almost three years. Mainframe revenue rose 32 percent, helping push hardware revenue up 2 percent to $5.2 billion.

Revenue from software, IBM’s most profitable business, climbed 17 percent to $5.6 billion.

Due to its stability, many investors view IBM shares as a safe haven in tough economic times. The stock has risen about 17 percent this year, compared with a 15 percent decline in the Dow Jones Industrial index .DJI and a 14 percent drop in the Nasdaq Composite Index .IXIC.

IBM trades at about 13 times next year’s expected earnings per share, compared with about 11 for rival Hewlett-Packard Co

HPQ.N.

IBM posted strong revenue in the United States and the rest of the Americas region even as the economy slowed due to the banking crisis and slowdown in construction and retail sectors.

Revenue in the Americas region rose 8 percent to $10.9 billion. Growth was 6 percent after currency adjustments.

Revenue from Europe, the Middle East and Africa rose 20 percent to $9.8 billion, or 7 percent after currency adjustments. IBM’s revenue in Asia rose 16 percent, or 6 percent after currency adjustments, to $5.3 billion.

Income from continuing operations rose 22 percent to $2.8 billion. The year-earlier results included a gain from the sale of a printing unit that the company has since divested. Without that gain, income from continuing operations would have been up 26 percent.

IBM shares fell to $126.12 in-after hours trading after initially rising about 2 percent from the New York Stock Exchange close of $126.52.

Reporting by Jim Finkle, Peter Henderson and Sue Zeidler, editing by Phil Berlowitz, Andre Grenon and Carol Bishopric

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