IBM Beat Buoys Hope

Updated from July 18

To the relief of tech investors, IBM (IBM Quote) beat earnings estimates by a penny and nailed its revenue expectations for the second quarter.

"The level of expectation on Wall Street was so low, in my mind, there was only one way to go afterward, and that was up," said Bob Djurdjevic, president of Annex Research, who owns Big Blue shares. "The absence of bad news was good news."

Djurdjevic said IBM's improvement in profitability in the software business was a positive, and mainframe revenue growth "was a pleasant surprise."

In early Wednesday trading, the stock was up 3%, gaining $2.20 to $76.46.

"We're really encouraged to see the overall gross margins continuing to increase," said Kim Caughey, a senior equity research analyst with Fort Pitt Capital Group, which holds IBM shares. She added that the company seems "pretty confident" that it has a pipeline of good deals, and it is not sacrificing closing the deals for lower margins.

The hardware and IT-services giant said net income rose to $2.02 billion, or $1.30 a share, a 14% improvement up from $1.83 billion, or $1.12 a share, a year earlier.

A Thomson First Call survey had expected the company to earn $1.29 a share.

Revenue tallied $21.89 billion, falling 2%, but up 1% when adjusted for the impact of the PC business. A year ago on the top line, IBM collected $22.27 billion, including $557 million for the last month of revenue from the PC business.

The top-line results were in line with analysts' anticipated sales of $21.89 billion.

The company's gross profit margin rose to 41.2% in the quarter from 39.4% last year, which includes the divested PC business. Excluding the PC business, last year's gross profit margin was 40.6%.