Uncertainty about the stability of world markets is clouding encouraging signs about the health of the technology sector.
Shares of IBM Corp fell nearly 4 percent on Monday after the company beat earnings expectations in the second quarter and raised its guidance for the year.
IBM disclosed a reduction in the value of services contracts, and revenue fell short. For a company that has consistently raised Wall Street’s expectations, IBM’s boost to its net income forecast this year didn’t seem enough.
IBM reported that its net income jumped 9 percent to US$3.39 billion, or US$2.65 per share, in the second quarter. That topped analyst projections of US$2.58 per share. A year ago, IBM earned US$3.10 billion, or US$2.34 per share.
Revenue in the latest period rose 2 percent to US$23.7 billion, from US$23.3 billion. That was below the US$24.2 billion that analysts expected.
IBM said changes hurt revenue by US$500 million in the quarter, something the company said analysts didn’t include in estimates.
The turmoil over Europe’s debt crisis has hurt IBM because of weakness in the euro relative to the dollar. Because IBM does most of its business outside the US, deals done in other currencies are now worth less when they’re converted to dollars.
The company also reported a 12 percent decline in the value of services contracts signed during the quarter to US$12.3 billion.
IBM blamed the signings shortfall on an unusually high number of contract extensions it signed last year as customers renegotiated their deals in the recession. IBM chief financial officer Mark Loughridge said that trend was mostly “in the rearview mirror.”
Still, investors have been worried about the ability of the governments of Greece, Portugal and Spain to repay perilously high debts. Sluggishness in the US economy’s improvement has helped stir fears of a “double-dip” recession.
Such worries have dampened Wall Street’s reaction to the results from other technology heavyweights as well.
IBM’s new guidance for this year calls for net income of at least US$11.25 per share, an increase of US$0.05 per share over the previous estimate. That reflects IBM’s confidence that it can wring more profit from its workhorse services and software divisions and from the rollout of a new mainframe. Still, it was short of the US$11.27 per share that analysts were expecting.
The second quarter was the 30th straight quarter in which IBM has posted higher earnings per share than the year before.
Cost cuts and stock buybacks are important ways IBM boosts its profit, with US$0.08 out of the US$0.29 per share improvement in its second-quarter income coming from buybacks.
A bigger factor, though, is IBM’s ability to squeeze more from its most profitable divisions.
Corporations are less reluctant to open their wallets than they were a year ago. IBM is in a sweet spot, because its most profitable products can save companies money by allowing them to outsource or automate complicated jobs. IBM is the world’s biggest provider of information-technology services and a major supplier of business software.
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