IBM raises guidance as Q2 profit blows past forecasts

IBM blew away second-quarter profit projections and jacked up its full-year earnings forecast Thursday, a rare sign of confidence from a major corporation amid the recession.

Even though IBM's sales are slipping, the results demonstrate the technology company's belief that it can continue wringing out more profit from its services and software divisions. IBM IBM has been relentless in cutting costs by automating tasks and shifting labor to cheaper locales, while protecting prices.

The 2009 profit forecast jumped to at least $9.70 per share, from $9.20 per share, a target that IBM set in January. IBM earned $8.89 per share last year.

"Big Blue appears recession-proof," Annex Research analyst Bob Djurdjevic wrote in an e-mail.

IBM regularly buys back its stock — which is one way to improve earnings per share, because it reduces the company's share count. That step alone boosted IBM's earnings per share by 42 cents last year. But IBM's chief financial officer, Mark Loughridge, said in an interview that the company won't need to accelerate buybacks to meet the newly raised forecast.

IBM said profit in the latest quarter, which ended June 30, rose 12% to $3.1 billion, or $2.32 per share. Analysts expected $2.02 per share.

Meanwhile, sales dropped 13% to $23.25 billion, lower than the $23.59 billion predicted by analysts polled by Thomson Reuters. Sales would have been down 7% without currency fluctuations.

"We are optimistic about how IBM is positioned to make the most of current growth opportunities as well as those that emerge as the economy recovers," IBM's chairman and chief executive, Sam Palmisano, said in a statement.

Shares of Armonk, N.Y.-based IBM rose $1.63, 1.5%, to $112.27 in extended trading after the earnings report. The stock had closed regular trading at $110.64, up 3.2% on the day.

IBM's results don't mean overall corporate technology spending has rebounded.

Consulting and outsourcing rival Accenture Ltd. says there are fewer opportunities in higher-end services. Dell Inc. this week said it still is finding it hard to sell PCs to corporations, which are holding on to machines longer than normal. Even chipmaker Intel Corp., which this week reported stronger-than-expected earnings and guidance, said large companies haven't loosened their pursestrings yet.

IBM's report showed that its services and software divisions were the stars, while hardware lagged. Pre-tax income rose 23% in services and 24% in software. IBM says those divisions can prosper in down times because they help make customers more efficient.

"It was flawless execution — they really did a great job," said Brian Marshall, an analyst with Broadpoint.AmTech.

Still, Marshall thinks IBM might run into trouble keeping up its pace of boosting profits, in part because pricing pressure for deals with large companies is "very intense" and IBM has already aggressively eliminated unprofitable parts of the business.

"I'm just not so sure where the real leverage is going forward," he said.

Hardware, which includes mainframe computers and servers — things that are easier for companies to put off in rough times — posted a 26% plunge in revenue to $3.9 billion.

IBM's services signings, reflecting revenue that mainly will be booked in future quarters, fell 5% to $14 billion in the second quarter.

However, analysts also closely eye IBM's services backlog, which is the total value of work IBM has under contract and has yet to complete. One reason the backlog can fall is if customers are renegotiating contracts to cut costs. IBM said its backlog stands at $132 billion, $6 billion higher than at the end of March.