03:33 19.07.2007 | All news from "Technology"
IBM Beats Q2 Views As Software Grows 13%
For the quarter that ended June 30, IBM (NYSE: - ) posted a profit of $1.50 per share, minus one-time expenses and gains, 15% above last year and 3 cents over views. Sales rose 9% to $23.8 billion, 3% over views.
IBM also nudged up its full-year earnings guidance, forecasting growth of 14% to 15% over last year to about $6.94 a share.
"No two ways about it, this was a great quarter," said IBM Chief Financial Officer Mark Loughridge during a conference call with analysts. "But our business success will be measured over the long term, not by any one quarter."
Software took center stage as sales grew 13% to $4.8 billion. Loughridge, who called the unit IBM's "most stable source of growth" on Wednesday, expects software to make up half of the company's pretax income by 2010 vs. 40% last year.
IBM's ambitious stock buyback program also helped. The company bought back $16 billion in stock this year as of April, according to Dawn Talbot of Soleil Securities.
"Management is being very aggressive about that (buyback strategy), which is considered a bullish signal," said Talbot. She rates IBM a buy with a price target of 120.
IBM's critical services business grew 7% in constant currency to $4.3 billion. Lehman Bros. analyst Harry Blount has an outperform rating, or buy, on IBM stock. But he voiced concerns about future services revenue growth.
"We are somewhat less optimistic regarding longer-term prospects of the services division as IBM is the largest competitor in a stagnating, commoditizing market," Blount wrote on Monday.
Hardware sales were flat compared with the year before, at $5.1 billion. IBM stands to benefit from a trend toward so-called green computing, in which customers cut down on energy usage and carbon emissions in their data centers, Talbot says.
In May, IBM announced a Project Big Green, pledging to spend $1 billion annually on new products and services to reduce its own carbon emissions.
Big Blue expects to sell more servers and virtualization software to help customers curtail energy consumption as well.
"The move toward green computing should impact their hardware business in a good way," Talbot said. "IBM is very well positioned to take advantage of this trend with their green technology initiative."
Although the software division has performed well this year, IBM has been challenged by weak sales of its iSeries server hardware, says Bill Shope of JPMorgan. He has a neutral rating on the stock.
"We remain concerned over the company's ability to maintain its competitive position in key hardware segments and further expand its services profits," Shope wrote in a research note.
IBM hardware rivals Hewlett-Packard (NYSE: - ), Dell (NasdaqGS: - ) and Apple (NasdaqGS: - ) represent "more attractive investments" than IBM, according to a note issued Wednesday by Robert Semple, a Credit Suisse analyst.
"We remain neutral on IBM shares owing to our belief that the earnings bar has been set relatively high at $11.00 in 2010," he wrote, adding that an EPS target of 10 is "more realistic."
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