International Business Machines Corp (IBM) sharply raised its full-year earnings forecast as it benefits from focusing more on higher-margin businesses in software and services, sending its shares up as much as 3 percent.
The outlook and stronger-than-expected quarterly earnings, coming on the heels of Intel’s stellar results this week, may signal that the worst could be over for the hard-hit technology sector, some analysts say.
Others point out that IBM managed to boost profits mainly by cutting costs and decreasing its dependence on hardware — an area that has bore the brunt of the worldwide downturn in technology spending.
IBM said it now expects earnings of at least US$9.70 per share this year, up from its previous outlook of US$9.20.
The company said it was ahead of its plan of achieving US$10 to US$11 earnings per share next year.
“This, combined with Intel’s results, is pushing me to be more optimistic,” said Kim Caughey, senior analyst at Fort Pitt Capital Group. “Seeing they made it on the bottom line, and were pretty darned close on the top line, it gives me confidence looking at technology in general.”
Leading chipmaker Intel unveiled stronger-than-expected earnings and an improved outlook this week, bolstering hopes that the worst of the industry’s downturn had passed.
Analysts said IBM’s higher outlook took the disappointment out of its lower-than-expected quarterly revenue, which fell 13 percent to US$23.3 billion. The market’s average forecast had been for US$23.5 billion, according to Reuters Estimates.
Net profit for the quarter rose to US$3.1 billion from US$2.8 billion in the year-ago quarter. Profit per share rose to US$2.32 from US$1.97, much higher than the average Wall Street forecast of US$2.01 per share, according to Reuters Estimates.
“In an unpleasant economic and financial world, these are incredible results,” said Mike Holland, chairman of investment firm Holland & Co.
But some analysts say IBM’s strong outlook may not necessarily signal improvement for the overall sector, since the stronger profit was largely a result of higher margins rather than sales.
Gross profit margin rose to 45.5 percent from 43.2 percent a year earlier and chief financial officer Mark Loughridge said there was room for further improvement.
Loughridge said economic conditions remained tough and avoided declaring that the worst was over, although he forecast a boost from US government stimulus plans to encourage discretionary spending and a weakening dollar.
IBM shares briefly rose around 3 percent in extended trade after closing up US$3.42, or 3.2 percent, at US$110.64 on the New York Stock Exchange. They later settled to around US$112.40, up 1.6 percent.
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