AP
IBM 3Q profit jumps 20 pct as hardware sales slump
Thursday October 16, 7:37 pm ET
By Jordan Robertson, AP Technology Writer
IBM 3Q profit jumps 20 pct despite slumping hardware sales; contract signings dip slightly


SAN FRANCISCO (AP) -- IBM Corp.'s third-quarter profit jumped nearly 20 percent, surpassing analyst estimates, as the technology company overcame slumping hardware sales and signed a healthy number of new services contracts.

Armonk, N.Y.-based IBM had released partial results for the July-September period last week to try to reassure investors who had been driving down the company's stock price. The move helped stop a steeper decline, but Wall Street was still waiting for word about how much new business IBM brought in during the period.

In a closely watched indicator, IBM signed $12.7 billion in new services contracts in the quarter, down 4 percent, which still showed it was able to lock in lots of new business despite the tough economic times. Short-term contract signings were up 13 percent to $6.1 billion.

IBM gets about half its revenue from annuity-like payments flowing from contracts it may have inked months or years ago for services like consulting or technology outsourcing.

Profit came in two cents per share ahead of analysts' recently revised estimates.

IBM earned $2.82 billion, or $2.05 per share, in the three months ended Sept. 30. That compares with net income of $2.36 billion, or $1.68 per share, in the year-ago period.

Analysts surveyed by Thomson Reuters were expecting $2.03 per share.

IBM continues to get better at wringing out more costs to improve its profit margins. Gross profit margin, or the profit on each dollar of sales once manufacturing expenses are stripped out, rose from 41.3 percent of sales to 43.3 percent of sales.

Mark Loughridge, IBM's chief financial officer, said cost-cutting and shunning less-profitable deals were key reasons for the increase. Growth outside the U.S. is also central to IBM's strategy. Sales from so-called "growth markets" increased 13 percent while major markets were up just 5 percent.

Loughridge said economic deterioration would have to get substantially worse for IBM to miss its forecast for 2008. IBM reiterated its target of at least $8.75 per share in profit for the year.

"We'd have to see a dramatic slowdown in our emerging countries, but we don't see that," he said on a conference call with analysts. "Even in a weaker demand environment, we have put exceptional focus on cost, expense and margin management."

IBM's total sales fell short in the third quarter.

IBM's revenue grew 4.9 percent to $25.3 billion. Stripping out currency fluctuations, sales grew 2 percent. Analysts expected $25.9 billion.

Sales were hurt by a 9.5 percent decline in the hardware business, which includes mainframes and computer servers.

While mainframe sales were up 25 percent, helping IBM in a big way because of the mainframe's fat profit margins, a line of cheaper servers built with industry-standard x86 processors fell 18 percent, and IBM said it expects weakness in that area to continue.

That's potentially a troubling trend for other companies like Hewlett-Packard Co. and Dell Inc. that also compete in the x86 server market.

IBM was strong in its most lucrative areas.

Services revenue grew 8 percent to $14.76 billion. Software sales rose 12 percent to $5.25 billion. Together, the two segments make up nearly 80 percent of IBM's sales and nearly 90 percent of its pretax profit.

IBM shares gained $2.23, 2.4 percent, to $93.75 in extended trading after the company reported its results. The stock gained $3.23, 3.7 percent, to close at $91.52 during the regular trading session.