IBM Boosts Profit Forecast After Quarter Tops Estimates

IBM Software Shift Helps Company Boost Full-Year Profit Forecast
Pedestrians walk past an IBM office in New York. Photographer: Scott Eells/Bloomberg

International Business Machines Corp.’s decadelong shift to higher-margin software sales helped the company overcome a slowdown in technology spending last quarter and boost its full-year earnings forecast.

Excluding some items, profit will increase to at least $15.10 a share this year, up from a previous forecast of $15, Armonk, New York-based IBM said yesterday in a statement. Analysts had predicted $15.06 on average, according to data compiled by Bloomberg. Earnings were $3.51 in the quarter, topping the $3.43 average estimate, even as sales declined.

IBM, the world’s biggest computer-services provider, aims to get half of its earnings from software by 2015 -- a move away from less-profitable hardware and services. Chief Executive Officer Ginni Rometty sees an opportunity for growth by selling software in developing economies and creating programs that work with cloud computing and business analytics.

“This quarter certainly suggests that the software play was a good idea,” said Andrew Bartels, an analyst with Cambridge, Massachusetts-based Forrester Research Inc. “The margins are much better than in other categories, and there are signs that demand may start to get stronger in the second half of the year.”

IBM rose 3.1 percent to $194.16 at 9:31 a.m. in New York. The stock had already climbed 2.4 percent this year.

Adding Salespeople

The company plans to hire as many as 300 salespeople each month for the rest of the year to help promote its software products, Chief Financial Officer Mark Loughridge said yesterday on a conference call. The shift to software, along with other moves such as stock buybacks and acquisitions, has helped IBM keep earnings stable through the economic headwinds in Europe and a slowdown in China, said Amit Daryanani, an analyst with RBC Capital Markets in New York.

“They’re continuing to execute on things that have worked for them in the past,” he said. “They have a lot of levers, like accelerating cost savings or doing more aggressive buybacks, to reach their numbers.”

IBM sales fell 3 percent to $25.8 billion last quarter, dragged down by sluggish demand for hardware and currency fluctuations. Adjusting for currency changes, the revenue climbed 1 percent. Analysts had predicted sales of $26.3 billion, the average of estimates compiled by Bloomberg.

Profit Goal

Rometty has a five-year plan that targets annual operating earnings of at least $20 a share by 2015, up from $13.44 last year. Analytics software, which helps businesses predict trends, is seen generating $16 billion in sales by 2015, while cloud computing will account for $7 billion. Companies are increasingly storing their data and programs in the cloud, which means they access the software online via remote data centers.

IBM has used buybacks to reduce its share count by a third since 2000 and boosted its repurchase plan by $7 billion in April. That has helped the company lift its earnings per share and stock price and won praise from investors such as Warren Buffett.

Second-quarter net income increased 5.9 percent to $3.88 billion, or $3.34 a share, from $3.66 billion, or $3, a year earlier. IBM’s sales in Europe, the Middle East and Africa were worth less when converted to dollars, as the euro declined about 12 percent from a year earlier. The credit crisis in the region also may have hurt growth.

“IBM hedges for that quite a bit, but currency got ugly,” said Ed Maguire, an analyst with Credit Agricole Securities in New York.

Formerly IBM’s sales and marketing head, Rometty, 54, succeeded Sam Palmisano in January. She became the first female CEO in the company’s 100-year history. Palmisano, who had been CEO since 2002, remains chairman.

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