Tags: IBM | Forecast | Earnings | Estimates

IBM Raises Forecast After Earnings Top Estimates

Wednesday, 17 July 2013 05:11 PM

International Business Machines Corp., the largest computer-services company, topped estimates with its second-quarter earnings and raised its forecast for the year after cutting costs and buying back shares.

Excluding a $1 billion restructuring expense, profit was $3.91 a share, the Armonk, New York-based company said Wednesday in a statement. That beat the $3.78 that analysts projected on average, according to data compiled by Bloomberg. IBM now expects to earn at least $16.90 a share in 2013, up from the $16.70 it forecast earlier this year.

IBM has managed to increase profit by shifting away from low-margin businesses, cutting jobs and repurchasing stock -- even as revenue slows. The company is betting that faster- growing areas such as cloud computing and data analysis can offset a broader slowdown in information-technology spending.

“IBM -- probably more so than other companies -- is very well-positioned and very durable,” Brad Zelnick, an analyst at Macquarie Capital USA, said in an interview before the earnings were announced. “But there are some grave concerns around the IT spending environment.”

The shares climbed as much as 4.1 percent to $202.50 in late trading after the results were released. The stock closed at $194.55 in New York, up 1.6 percent this year, trailing an 18 percent gain for the Standard & Poor’s 500 Index.

Earlier Shortfall

By beating earnings estimates, IBM rebounds from a rare stumble last quarter, when its profit missed projections for the first time in eight years. Even so, revenue continued to decline, falling 3.3 percent to $24.9 billion from a year earlier. In addition to a slump in demand, currency changes took a toll on results last quarter. In Japan, where IBM made about 10 percent of its sales last year, the yen fell 5 percent versus the dollar in the second quarter.

Competitors are suffering as well. Accenture Plc, the world’s largest technology-consulting company after IBM, gave a sales forecast last month that missed analysts’ estimates. Accenture blamed customers deferring decisions on long-term contracts. Oracle Corp., meanwhile, has missed sales estimates for two straight quarters, hurt by slumping hardware revenue and a shift by customers to applications delivered online.

Five-Year Plan

IBM prioritizes earnings over revenue growth in its five- year road map, which is targeting profit of $20 a share by 2015, up from the $15.25 earned last year. The plan calls for a combination of buybacks, acquisitions and investments in faster- growing markets to reach that goal.

Following the previous quarter’s earnings shortfall, Chief Executive Officer Ginni Rometty shook up the management of IBM’s struggling hardware division. She replaced Rod Adkins with Tom Rosamilia, who had been overseeing corporate strategy. That division saw a 12 percent decrease in sales last quarter, an improvement from the 17 percent drop in the first quarter.

IBM also embarked on a restructuring program last quarter, cutting jobs globally. More than 3,300 workers were dismissed in the U.S. and Canada alone, according to Alliance@IBM, an employee group.

The company said in April that divestitures would help offset the $1 billion cost of the restructuring. At the time, IBM was in talks to sell parts of its server division to Lenovo Group Ltd., according to people familiar with the discussions. The negotiations broke down in early May due to disagreements over price, one person said.

‘Active Discussions’

Wednesday the company said it was reducing its expectations for second-half gains from a divestiture.

“The substantial second-half gain that we were counting on in our view of EPS will not likely close at the end of this year, but we’re still in active discussions,” Chief Financial Officer Mark Loughridge said on a conference call. “As you know, we have a very disciplined M&A process. We’re not going to underprice or rush a divestiture simply to close within 2013.”

Second-quarter net income fell 17 percent to $3.23 billion, or $2.91 a share, from $3.88 billion, or $3.34, a year earlier. The company paid $1 billion in dividends and made $3.6 billion in stock buybacks in the period, boosting earnings per share.

“We expect continued improvement through the second half of the year and remain confident that we will achieve our increased 2013 operating EPS expectation of at least $16.90, excluding the $1 billion workforce rebalancing charge in the second quarter,” Rometty said in the statement.

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International Business Machines Corp., the largest computer-services company, topped estimates with its second-quarter earnings and raised its forecast for the year after cutting costs and buying back shares.
Wednesday, 17 July 2013 05:11 PM
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