IBM Declines After Missing Sales Estimates on Slowing Demand

International Business Machines Corp. (IBM), the biggest computer-services company, fell the most in two months after missing sales estimates for the first time in five quarters.

IBM dropped 4.1 percent to $178.90 at the close in New York, the biggest daily decline since Aug. 18.

Sales for the third quarter climbed 7.8 percent to $26.2 billion, Armonk, New York-based IBM said yesterday. Analysts predicted $26.3 billion, the average of estimates compiled by Bloomberg. Revenue showed slowing growth in IBM’s software, hardware and services businesses.

“Because they didn’t beat, the stock’s going to trade down; the expectation is pretty high for this name,” said Josh Olson, an analyst with Edward Jones & Co. in Des Peres, Missouri, who has a “buy” rating on the stock. A slowdown in hardware revenue growth is occurring “sooner than I expected.”

Chief Executive Officer Sam Palmisano is focusing on areas such as business analytics, emerging markets and cloud computing to boost sales amid sluggish economic expansion. The U.S. economy grew at a 1.3 percent pace in the second quarter following a 0.4 percent gain in the previous three months, the weakest performance in two years.

Slowing Growth

Declines in Japan and the public sector weighed on the performance of IBM’s services business, Chief Financial Officer Mark Loughridge said on a conference call. IBM has more exposure to Japan than competitors, David Grossman, an analyst at Stifel Nicolaus in San Francisco, said in a note to investors.

Sales growth at IBM’s services unit slowed to 8 percent from 10 percent in the second quarter, while revenue expansion at its software unit decelerated to 13 percent from 17 percent. Hardware sales growth slowed to 4 percent from 17 percent.

IBM shares have risen 22 percent this year. The stock reached a record of $190.53 on Oct. 14, and at least three analysts revised their price estimates to $200 a share or higher that week. In September, IBM passed Microsoft Corp. in market value based on closing prices for the first time since 1996 before the companies switched back.

“This is a name that you’re expecting in this environment to perform very strong,” said Brad Zelnick, a Macquarie Capital USA analyst who added coverage of IBM last week. “Any deceleration in signings or any significant drain on backlog is going to send shares down.”

Analysts at BMO Capital Markets and FBN Securities reduced their ratings for IBM shares after the earnings report.

Backlog Shrinking

Contract signings for services, which make up about 60 percent of IBM revenue, were $12.3 billion, compared with $11 billion a year earlier. Analysts on average estimated $12.5 billion, UBS AG said in a note to investors.

Backlog, which measures expected future revenue from contracts, shrank to $137 billion in the quarter from $144 billion in the second quarter, largely because of changes in currency exchange rates, Loughridge said.

Third-quarter net income rose 7 percent to $3.84 billion. Profit on an operating basis rose to $3.28 a share, beating the $3.22 average analyst estimate.

Operating earnings will climb to at least $13.35 a share this year, up from a previous projection of at least $13.25, IBM said. Analysts predicted $13.33 on average.

‘Bellwether’

Revenue from growth markets, such as Brazil, India and China, climbed 19 percent last quarter. Sales from the regions will make up at least 30 percent of revenue by 2015, the company has said, up from 21 percent in 2010.

“Growth-market performance was terrific across all segments,” Loughridge said.

It was the fifth consecutive quarter of double-digit growth in these markets, and it led revenue growth in all business segments, Loughridge said. IBM opened up 80 new branches, he said.

“They’re very ahead of where the big markets will be in a few years, and it’s very important for them to have a footprint there,” Ed Maguire, an analyst at Credit Agricole Securities USA, said in an interview. He has an “outperform” rating on the shares.

Palmisano has said he plans to spend about $20 billion on acquisitions between 2010 and 2015. So far the company has spent about $3 billion in acquisitions related to cloud computing, said Steven Tomasco, an IBM spokesman.

Because of IBM’s global position and broad set of computer services, it is “about as close as you can get to a technology index fund,” Maguire said. “They’re a bellwether for the rest of the market.”

Accenture Plc and Oracle Corp. (ORCL), which compete with IBM in selling services to technology companies, both benefited from increased spending by business clients in their most recent quarters.

To contact the reporter on this story: Sarah Frier in New York at sfrier1@bloomberg.net

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

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