IBM Gains Most in Two Years After Raising Profit Forecast

IBM Sales Beat Estimates as Companies Spend More on Software
Pedestrians walk outside the International Business Machines Corp. (IBM) offices in New York. Photographer: Daniel Acker/Bloomberg

International Business Machines Corp., the biggest computer-services company, climbed the most in more than two years after reporting sales that beat analysts’ estimates and lifting its profit forecast amid buoyant demand for software.

Second-quarter revenue rose 12 percent to $26.7 billion, Armonk, New York-based IBM said yesterday. That topped $25.4 billion, the average estimate of analysts surveyed by Bloomberg. IBM raised its full-year earnings forecast to at least $13.25 a share, compared with analysts’ average estimate of $13.21.

Software sales advanced 17 percent, evidence that Chief Executive Officer Sam Palmisano is making headway on efforts to bulk up in that area, in addition to services, IBM’s mainstay. Together, the divisions accounted for 80 percent of IBM’s sales in the quarter, up from 65 percent a decade earlier.

“They’ve done a good job of adjusting their business model so that it’s more in line with the macro trends that we see in technology,” said Joseph Foresi, an analyst at Janney Montgomery Scott LLC in Boston, who rates the company “buy” and doesn’t own the shares. “They’re very much forward-looking in their business strategy.”

The company signed global services contracts worth $14.3 billion in the quarter. Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co. in New York, estimated contract signings of $12.8 billion.

IBM climbed $9.93, or 5.7 percent, to $185.21 at 4 p.m. in New York Stock Exchange trading, the biggest intraday gain since March 23, 2009. It has climbed 26 percent this year. At least ten analysts raised their price estimates for the stock.

Hardware Gains

Even as it focuses on software and services, IBM is boosting sales of hardware, such as server computers, powerful machines that run corporate networks. Sales at the hardware division rose 17 percent as companies spent more to upgrade dated technology.

“This is the time for IBM,” said James Kelleher, an analyst at Argus Research in New York, who recommends buying the stock. “They’ve spent 20 years structuring their operating model for the second half of an IT refresh cycle. IBM is much better suited to this kind of environment because we’ve moved to the second phase, where services, solutions and software matter.”

Sales at the services business, IBM’s largest, increased 10 percent to $15.1 billion. The backlog of IBM’s services contracts expanded to $144 billion.

“They’re taking a lot of market share in the hardware business and helping drive along margins,” said Chris Whitmore, analyst at Deutsche Bank AG in San Francisco. “Corporate IT spending is still healthy.”

Grids, Emerging Markets

Net income rose 8.2 percent to $3.66 billion, or $3 a share, from $3.39 billion, or $2.61, a year earlier. Excluding some items, earnings were $3.09 a share, beating the $3.02 average of analysts’ estimates.

IBM is seeking to boost operating earnings to at least $20 a share in 2015. The company is investing in businesses such as cloud computing and analytics software, which it predicts will generate $7 billion and $16 billion in revenue, respectively, by that year. The global market for cloud-related services may more than double to $148.8 billion in 2014 from $58.6 billion in 2009, according to Gartner Inc. in Stamford, Connecticut.

Those steps, along with investments in emerging markets and Smarter Planet -- IBM’s plan to digitize power grids, roads and other infrastructure -- will help add on about $20 billion in sales through 2015, IBM has said. In 2010, emerging markets including Brazil, China and India accounted for 21 percent of IBM’s revenue by geography, up from 11 percent a decade earlier.

‘Stable Model’

Palmisano, who turns 60 this month, said last year the company plans to make about $20 billion in acquisitions by 2015. IBM is also developing services to monitor bank mainframes, railroads and electrical grids. The company expects software to make up half of total profit in 2015.

“IBM has answered the question: How do you add value while hardware is becoming increasingly commoditized?” said David Grossman, a San Francisco-based analyst for Stifel Nicolaus & Co. who rates the stock “buy” and doesn’t own it. “It’s a pretty stable model.”


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