IBM Forecast Tops Estimates After Earnings Rise on Software

International Business Machines Corp. (IBM), the world’s biggest computer-services provider, forecast 2012 earnings exceeding analysts’ estimates after fourth-quarter profit rose 4.4 percent because of rising software demand.

Earnings, excluding some items, will increase to at least $14.85 a share this year, Armonk, New York-based IBM said today. Analysts projected $14.81, the average of estimates compiled by Bloomberg. Fourth-quarter operating earnings advanced to $4.71 a share, beating the $4.62 analysts predicted.

Virginia “Ginni” Rometty succeeded Sam Palmisano this month, becoming the first female chief executive officer in the company’s 100-year history. She inherits a five-year plan that includes boosting software to half of IBM’s earnings, with a focus on programs that help businesses analyze and project trends, as well as on cloud computing and emerging markets.

“Software was a relative strength,” Shebly Seyrafi, an analyst at FBN Securities in New York with a “sector perform” rating on the stock, said in an interview. “It’s a bit relieving that IBM, which is a bellwether in technology, did not disappoint investors.”

Sales increased 1.6 percent to $29.5 billion, compared with the $29.7 billion analysts had predicted. The euro declined 3.2 percent against the dollar last year amid Europe’s debt crisis. The drop means revenue from Europe, which combined with Middle East and Africa accounts for almost a third of IBM’s sales, is worth less when converted to dollars.

Rometty’s Moves

IBM gained as much as 3.9 percent to $187.50 in extended trading, after closing at $180.52. The shares reached a record in 2011 and rose 25 percent for the year. They had lost 1.8 percent this year as of today’s close.

Rometty, 54, formerly IBM’s sales and marketing head, took the helm Jan. 1 after the succession was announced in October. Palmisano, who had been CEO since 2002, remains chairman.

In her first promotions this month, Rometty named Bruno Di Leo as sales and distribution chief and Bridget Van Kralingen as head of consulting, replacing a retiring Frank Kern. She also named James Bramante senior vice president of growth markets, an elevated title as IBM seeks to boost the unit’s sales.

IBM has set goals of adding $20 billion in new revenue, including spending about $20 billion on acquisitions, from 2010 through 2015, as it expands offerings to business customers.

Growth Markets

Fourth-quarter net income rose to $5.49 billion, or $4.62 a share, from $5.26 billion, or $4.18 a share, a year earlier. Operating earnings a year earlier were $4.25 a share.

Profit expansion this year will be “more skewed to the second half,” Chief Financial Officer Mark Loughridge said on a conference call today. IBM has said it targets annual operating earnings of at least $20 a share by 2015.

“We are well on track toward our long-term roadmap for operating earnings,” Rometty said in the statement. “We continued to realize the benefit of our long-term investments in growth markets, business analytics, Smarter Planet solutions and cloud.”

Sales at IBM’s software unit rose about 9 percent to $7.6 billion, boosted by demand for brands such as Tivoli and Lotus. Services revenue growth slowed to 3 percent from the third quarter’s 8 percent, while hardware sales fell 8 percent.

Backlog, which measures expected future revenue from contracts, totaled $141 billion in the quarter, up $4 billion from the third quarter. Contract signings for services, which make up about 60 percent of IBM revenue, fell 8 percent from a year earlier to $20.4 billion.

Services revenue will rise at least 3 percent this year, based on the backlog growth, Loughridge said.

“We continue to build our momentum in software,” he said. “Our services business delivered powerful margin and profit growth.”

Revenue from growth markets, such as Brazil, India and China, increased 7 percent in the fourth quarter. Sales from the regions will make up at least 30 percent of revenue by 2015, the company has said, up from 22 percent in 2011.

To contact the reporter on this story: Beth Jinks in New York at bjinks1@bloomberg.net

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

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