IBM 3Q earnings: Good, but not that good

Big Blue meets estimates, despite not-too-hot sales

IBM met the Street estimate in its third quarter Tuesday, earning $2bn, or $1.08 a share. However, the $21.8bn in sales came in at the low end of most analysts' estimates.

First Call consensus pegged IBM for a profit of $1.08 a share in the quarter.

Ahead of the earnings report, IBM shares closed up $1.88 to $113.

The $21.8bn in sales marked a modest 3 percent improvement from the year-ago quarter when it earned $1.8bn, or 93 cents a share, on sales of $21.1bn.

Most analysts had predicted Big Blue would record sales of between $21bn to $23bn in the quarter.

"This was a solid quarter, with earnings per share up 20 percent and an acceleration of revenue growth relative to the first half of the year," said chief executive Louis Gerstner in a prepared release. "We would like to have seen more revenue in the quarter, but we were held back by three items."

Gertsner said demand for the company's microelectronics products outstripped its ability to manufacture components. He also said demand for its System/390 servers declined as customers awaited the release of its newer high-end server products. He also said parts of the company's software business slowed "unexpectedly" in September.

On a conference call with analysts, chief financial officer John Joyce echoed Gerstner. While acknowledging IBM was good at the "basic blocking and tackling," Joyce said currency fluctuation, namely a weak euro, took three percent off of revenue growth.

Gross profit margins checked in at 35.8 percent, flat with the year-ago quarter. IBM's cash position was halved to $3bn compared to a year ago due to stock repurchase programs.

Software sales fell three percent to $2.9bn in the quarter, reflecting what the company called "sales execution issues" near the end of the quarter as well as an industry-wide transition in the systems management software marketplace.

Joyce said IBM aggressively hired software sales staff, but productivity was down as these new employees got up to speed. Meanwhile, sales from IBM's Tivoli unit were weak because of a "shift from integrated software to specific solutions". WebSphere was a bright spot with sales jumping 200 percent year-over-year.

Hardware sales improved four percent in the quarter to $9.5bn and its much-maligned PC unit finally turned a profit of $65m.

Storage revenues were mixed, with high-end disk drive sales, led by its Shark product. Strong sales of its popular microelectronics components helped offset a decline in disk-drive sales.

Services sales jumped 4 percent from the year-ago quarter to $8.2bn, primarily due to outsourcing services in the Asia-Pacific region. IBM had a services backlog of $81bn at the end of the quarter. "We continue to see e-business driving demand for services," said Joyce.

Geographically, sales into the Americas inched up one percent to $9.7bn. Sales from the Europe/Middle East/Africa region fell three percent to $5.6bn while sales into the Asia-Pacific region soared up 19 percent to $4.3m.

Gerstner said the company's broad product catalogue helped the company ride out a particularly rocky quarter.

"This has turned out to be an unusual year for the information technology industry, with many ups and downs," he said. "We expect our broad portfolio will be even more important as we go forward, especially compared to the single-segment companies in our industry."

Last quarter, IBM raked in $1.9bn, or $1.06 a share, on sales of $21.7bn.

Its shares moved as high as $134.94 in September after falling to a 52-week low of 89 in November.

Twenty-one of the 22 analysts following the stock rate it either a "buy" or "strong buy".

First Call consensus expects it to earn $4.45 a share in the fiscal year.

Take me to ZDNet's Q3 Earnings Roundup.

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