IBM Boosts Profit Forecast; Contract Signings Fall Short

International Business Machines Corp. (IBM), the world’s largest computer-services provider, boosted its full-year profit forecast as companies buy more software and equipment.

Operating earnings will be at least $13.15 a share this year, higher than a previous projection of at least $13 and the $13.08 average estimate of analysts surveyed by Bloomberg. First-quarter services signings fell 14 percent from a year earlier, Armonk, New York-based IBM said today, erasing a gain in the shares in extended trading.

The contract signings were “a blemish,” although they aren’t a good indicator of future revenue, said Chris Whitmore, an analyst at Deutsche Bank AG in San Francisco who recommends buying the stock. For the first quarter, IBM reported “a solid revenue beat, driven by improvement in services and strength in hardware.”

Sales last quarter climbed 7.7 percent to $24.6 billion, topping projections, as software, hardware and services revenue jumped. Equipment sales climbed for the fifth straight quarter as customers continued to upgrade after IBM released its Power7 server-computer system and a new mainframe last year.

IBM slid $4 to $161.40 at 6:17 p.m. after rising to $170 in extended trading. Before the earnings’ release, the stock fell 54 cents to $165.40 in New York Stock Exchange composite trading. The shares have climbed 13 percent this year.

‘Volatile’ Signings

Signings -- the value of new contracts signed during a specific quarter -- declined to $10.5 billion. It’s the fourth time in five quarters that a drop in new contract signings overshadowed an improved profit forecast.

The signings figure is “volatile” and not as accurate a predictor of sales as the backlog, which includes contracts accumulated over time, Chief Financial Officer Mark Loughridge said on a conference call today. Backlog climbed 5.6 percent to $142 billion last quarter.

First-quarter net income rose 10 percent to $2.86 billion, or $2.31 a share, from $2.6 billion, or $1.97, a year earlier.

Profit on an operating basis was $2.41 a share, compared with analysts’ average estimate of $2.30. This is the first year IBM is reporting on an operating format, which excludes acquisition and some retirement costs.

Hardware sales climbed 19 percent to $4.02 billion, the largest jump of any segment. Software revenue rose 5.8 percent to $5.31 billion. Sales from emerging markets, which IBM expects to make up almost 30 percent of revenue in 2015, advanced 18 percent.

Gross profit margin expanded to 44.1 percent last quarter, from 43.6 percent a year earlier. The company had about $220 million in workforce restructuring costs, Loughridge said.

‘Limited’ Japan Effect

IBM, which gets about 11 percent of its sales from Japan, saw a limited effect from last month’s earthquake, Loughridge said on the call. The company’s infrastructure in the country, which is in “very good shape,” had about $20 million in damages. The company doesn’t expect “appreciable impact” on its supply chain, he said.

Operating earnings will be at least $20 a share in 2015, IBM said last month, reiterating a forecast from a year ago.

The company is investing in cloud-computing and analytics- software businesses, which the company predicts will generate $7 billion and $16 billion in revenue, respectively, by 2015. Those initiatives, along with investments in emerging markets and Smarter Planet -- IBM’s plan to digitize physical infrastructure -- will help add on about $20 billion in sales through 2015, the company said last month.

Chief Executive Officer Sam Palmisano also plans to make about $20 billion in acquisitions in the same period, a projection he first gave last year.

To contact the reporter on this story: Katie Hoffmann in New York at khoffmann4@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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