IBM raises ‘09 guidance again; customers tightfisted but company expects to wring more profit

By Jordan Robertson, AP
Thursday, October 15, 2009

IBM boosts ‘09 guidance again even as sales slump

SAN FRANCISCO — IBM Corp. has jacked up its profit guidance for the second time this year, a sign of the company’s confidence that it can uncork more profit from its business despite falling sales.

The company’s third-quarter results, reported after the market closed Thursday, show that corporations are still reluctant to spend on some kinds of technology. IBM’s sales fell 7 percent, and all its major divisions suffered declines.

But IBM keeps making more money — net income was up 14 percent — largely because it has been focusing on outsourcing and other services that save clients money and are more profitable for IBM than selling hardware. That has been the key element of IBM’s transformation from a hardware company on the brink of collapse in the 1990s to a one-stop technology shop that rivals are trying to emulate.

Nearly a fifth of the company’s revenue still comes from hardware, however, and IBM’s chief financial officer, Mark Loughridge, said in an interview that a significant help in the quarter came from market share gains in servers at the expense of Sun Microsystems Inc.

IBM has exploited uncertainty about Oracle Corp.’s proposed $7.4 billion takeover of Sun, the world’s No. 4 server maker, to steal customers. That deal still needs antitrust approval in Europe.

IBM says 2009 earnings should be at least $9.85 per share, ahead of analysts’ forecasts for $9.78 per share, according to Thomson Reuters. IBM had raised its guidance before, in July, to at least $9.70 per share.

Despite IBM’s optimistic forecast, some investors apparently expected an even greater increase. IBM shares fell 3.7 percent in extended trading after closing the regular session at $127.98, down 37 cents.

“A lot of us thought you might get even better than this,” said Peter Misek, an analyst with Canaccord Adams. “But these results are solid.”

The recession has made it hard to win new business. Corporations have coped with evaporating revenue by canceling or delaying big technology projects. Indeed, the value of services contracts that IBM signed in the quarter was $11.8 billion, a decline of 7 percent from the same period in 2008.

One sign of the lingering distress came this month in disappointing guidance from the Accenture consulting firm, an IBM competitor. It hesitated to predict the timing for a full recovery in business spending. Another technology bellwether, Intel Corp., has been talking up a recovery in personal computer sales, but warned this week corporate spending would likely remain weak until the new year.

In IBM’s third quarter, which ended Sept. 30, net income was $3.2 billion, or $2.40 per share, ahead of analysts’ expectation for $2.38 per share. In the same period last year, IBM’s profit was $2.8 billion, or $2.04 per share.

Sales were $23.6 billion, slightly better than the $23.4 billion expected by analysts polled by Thomson Reuters. Revenue would have been down 5 percent instead of 7 percent if it were not for currency fluctuations. A weak dollar means deals IBM does in other currencies translate into more greenbacks.

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