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IBM reports dip in quarterly revenue

Job cuts and the spinoff of the personal-computer division aided third-quarter profits at International Business Machines Corp., which beat analysts’ forecasts despite a slight revenue shortfall.
/ Source: The Associated Press

Job cuts and the spinoff of the personal-computer division aided third-quarter profits at International Business Machines Corp., which beat analysts’ forecasts despite a slight revenue shortfall.

In the three months ending Sept. 30, IBM earned $1.52 billion, or 94 cents per share, on revenue of $21.5 billion.

In the same period last year profit was $1.55 billion, 92 cents per share, on revenue of $23.3 billion.

But comparisons are complicated because last year’s figures included IBM’s personal-computer division, which since has been sold to China’s Lenovo Group Ltd. The year-ago quarter also included a one-time charge of $320 million from the settlement of a pension-related lawsuit.

Without that charge and the PC operations, the continuing operations last year earned $1.03 a share.

This year’s third quarter included a $525 million tax payment that IBM had to make as it repatriated $9 billion in profits earned overseas. Without that charge, IBM’s continuing operations showed income of $1.26 per share.

That easily surpassed the $1.13 per share that analysts surveyed by Thomson Financial had been expecting. But IBM fell short of the revenue forecast of $21.7 billion, as sales rose just 4 percent over last year’s non-PC operations.

The results were an important benchmark in what has been an uneven year for IBM, which has yet to completely persuade Wall Street that its strategy of selling a wide slate of “business performance transformation services” will dramatically transform IBM’s own results.

The company’s first-quarter results fell short of Wall Street’s forecasts, prompting the company to cut 14,500 jobs. While the next period provided stronger earnings, IBM shares are still down 16 percent this year.

Even upgrades from some analysts in the past week failed to do much to lift the stock, which gained 24 cents to close at $82.59 on the New York Stock Exchange before Monday’s report was released. The shares have traded between $71.85 and $99.10 over the past 52 weeks.

In extended trading, the stock moved above $84.

IBM’s gross profit margin was 40.6 percent in the third quarter, up from 36.5 percent last year, when the low-margin PC business was still in the mix. Not counting PCs, the company’s profit margin would have been 40.0 percent last year.

Hardware sales rose 7 percent over last year, excluding PCs. Big Blue benefited somewhat from the September release of its new z9 mainframes, giant corporate computers that cost more than $1 million each. Lower-cost servers, though, were the segments showing growth.

Services revenue increased only 3 percent, though the division booked $11 billion in contracts in the quarter.

Software, meanwhile, saw a 5 percent revenue gain. The unit is IBM’s most profitable, turning in gross margin of 87.4 percent in the third quarter.

“IBM had a good quarter,” Chairman and CEO Sam Palmisano said in a statement. “It showed the strength of our business model across hardware, software and services, and we continued to see the benefit of the strategic transitions that we’ve implemented in past quarters.”

Among the downsides was a disappointing performance in Asia, where revenue fell 2 percent with currency fluctuations taken into account. IBM’s chief financial officer, Mark Loughridge, said IBM would take actions to improve operations in Asia.

Loughridge also said the rising dollar could hurt IBM’s sales and profits in coming quarters. Strength in the U.S. currency can make it tougher for U.S. exporters to compete in foreign markets. And it lowers the dollar value of deals in other currencies.

Still, he expressed confidence that IBM would generate double-digit growth in earnings per share in the fourth quarter.

Analyst Bob Djurdjevic of Annex Research said IBM gave investors good reason to anticipate a solid fourth quarter, when the company is expected to reap a full three months of sales in mainframes and chips for video game consoles.

But he said he found IBM’s services performance lackluster, with the $11 billion in contract bookings essentially “treading water” from previous periods. Djurdjevic said that was especially discouraging considering the strong results recently posted by consulting competitor Accenture Ltd., raising the question of whether IBM’s services arm is too big to be nimble.

In the first nine months of 2005, IBM earned $4.75 billion, $2.90 per share, on revenue of $66.7 billion. In the first three quarters of last year, profits were $4.65 billion, $2.72 per share, on revenue of $68.6 billion.