IBM, the world's largest technology services company, on Tuesday reported a 47 percent rise in quarterly profit, easily beating expectations, after boosting software sales through acquisitions and improving hardware and services revenue.
The shares added more than 5 percent in after-hours trading and the company expected to beat earnings forecasts for the full year.
Net income in the third quarter rose to $2.22 billion, or $1.45 per share, from $1.52 billion, or 94 cents per share, a year earlier, when IBM had a $525 million tax charge for repatriating overseas earnings. Revenue rose to $22.6 billion from $21.5 billion.
"There is some optimism about the faster-growing parts of the business and I guess we have been waiting a long time," said Richard Sichel, chief investment officer at Philadelphia Trust Co., which manages about $1.5 billion for clients, including IBM shares.
"The services business is apparently picking up some steam."
International Business Machines Corp. of Armonk, New York, in the third quarter announced more than $3.6 billion of acquisitions in software companies as it expanded its most profitable business amid slowing growth in computer services, its largest unit. Software revenue rose 8.5 percent to $4.4 billion in the third quarter.
IBM shares rose 5.5 percent to $91.65 in extended trading following the earnings report from a close of $86.95 on the New York Stock Exchange.
Profit exceeded the average view of Wall Street analysts of net income of $1.35 per share and revenue of $22.1 billion as compiled by Reuters Estimates.
"It is reasonable for you to roll through the 10 cent EPS over-achievement to full-year estimates," Chief Financial Officer Mark Loughridge told analysts on a conference call.
IBM Global services revenue rose 2.7 percent to $12 billion in the quarter and the company signed services contracts totaling $10.5 billion.
"There was some nervousness given the lack of billion- dollar deals announcements during the quarter," said Marc Heilweil, president of Spectrum Advisory Services Inc., which oversees about $360 million. "But bookings for services of $10.5 billion were good."
Sales were also helped by demand for IBM mainframe computers used by corporations, governments and universities for complex computing tasks. Overall, hardware revenue rose 8.9 percent to $5.58 billion.
IBM shares gained 7 percent in the third quarter, but the stock trades at just 13 times expected 2007 earnings per share, a 14 percent discount to Hewlett-Packard Co. , IBM's closest competitor, and a 15 percent discount to the average price-to-earnings multiple of companies on the Standard & Poor's 500 Index.