IE 11 is not supported. For an optimal experience visit our site on another browser.

IBM bounces back from disappointing earnings

International Business Machines Corp. on Monday reported a rise in quarterly operating income, which excludes the effects of job cuts, the sale of its PC business and a legal settlement with Microsoft.
/ Source: Reuters

International Business Machines Corp. rebounded from a previous disappointment by reporting second-quarter earnings Monday that surpassed analysts’ expectations. Improvement in the services division buoyed the results.

In the quarter that ended June 30, IBM showed net profit of $1.83 billion, or $1.12 per share, compared with $1.74 billion, or $1.01 per share, in the previous year.

However, that comparison is skewed because the sale of IBM’s personal computer division to China’s Lenovo Group Ltd. closed on May 1, lowering the figures IBM posted in the remaining two months of the quarter. Looking only at continuing operations, IBM showed a profit of $1.85 billion, $1.14 per share.

Second-quarter revenue was $22.27 billion, down 4 percent from $23.10 billion a year ago. Without the one month of sales in the PC business, IBM’s revenue would have been about $21.70 billion.

Analysts surveyed by Thomson Financial had forecast earnings of $1.03 per share on revenue of $21.96 billion.

“IBM returned to form in this quarter,” Chairman and CEO Sam Palmisano said in a statement.

IBM shares fell 57 cents to close at $81.81 on the New York Stock Exchange before the earnings report. The stock jumped above $85 in after-hours trading.

The second-quarter figures included three big events that Wall Street traditionally discards when assessing a company’s performance. IBM showed a gain of $1.1 billion from the Lenovo sale and a $775 million boost from an antitrust settlement with Microsoft Corp. IBM also took a $1.7 billion charge to account for the elimination of up to 14,500 jobs, primarily in Europe.

The company earlier had said the job cuts would top out at around 13,000. IBM’s chief financial officer, Mark Loughridge, said about half the affected people have already left the company.

IBM’s numbers were sure to be closely scrutinized for signs that Big Blue overcame the first-quarter problems that then caused earnings of 84 cents per share, or 85 cents on a recurring basis, well short of the 90 cents in analysts’ forecasts.

At the time, some analysts said the gap would have been even bigger had IBM not misled Wall Street about the effect of expensing employee stock options. IBM said last month that the Securities and Exchange Commission was investigating.

One of the weak spots blamed for the first-quarter results was the technology-services division, which provides more than half of revenue. In the second quarter, however, IBM said services revenue increased 6 percent, or 4 percent without currency fluctuations. Gross profit margins in the segment also improved, to 26.1 percent from 24.4 percent a year ago.

Services contracts signed in the quarter, another closely watched figure, increased to nearly $15 billion, ending what Loughridge said was six consecutive quarters of declines. In response to an analyst’s question, Loughridge said IBM had not offered “extraordinary” price breaks or other incentives to win the business and erase the soft first quarter.

In the first half of 2005, IBM earned $3.23 billion, $1.96 per share, on revenue of $45.18 billion. In the first half of 2004, the company’s net income was $3.10 billion, $1.80 per share, with revenue of $45.27 billion.

Loughridge said analysts’ forecasts for the rest of the year “remain reasonable,” though he said second-half revenue could be hurt if the dollar continues to strengthen against the euro. Strength in the U.S. currency can make it harder for big U.S. exporters to compete in foreign markets, and it lowers the dollar value of deals in other currencies.

IBM might also face a one-time tax charge of about $450 million if it takes advantage of a 2004 law that would let the company repatriate income earned overseas. IBM had said it would repatriate about $8 billion, but Loughridge said Monday the company was working to increase that to $9 billion.