IBM Nails First-Quarter Earnings, Sticks to Guidance

Updated from 4:31 p.m. ET

Steady as she goes. Computing behemoth IBM (IBM Quote) released first-quarter earnings in line with Wall Street's expectations after the close of regular trading on Wednesday.

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For the quarter, the Armonk, N.Y.-based company reported net income of $1.75 billion, or 98 cents a share, matching the consensus earnings estimate of analysts polled by First Call/Thomson Financial. Sales, meanwhile, totaled $21 billion, about $200 million above expectations and 8.8% above the year-ago period.

In a period when technology stocks of nearly every stripe have been warning of slowing sales and profits, there were several encouraging signs. Gross profit margins rose 0.3 percentage points from the first quarter of 2000, while gross margins in the company's hardware business -- the segment in which nearly every company has been seeing margins contract lately -- rose nearly 3 full percentage points. Moreover, CFO John Joyce said that gross margins improved in every hardware segment, which includes personal computers. (Joyce also said that IBM lost money on PCs in the quarter, though.)

More important, Joyce told analysts and investors listening to the post-release conference call that the company saw no reason to lower its guidance. "We remain on track for your consensus EPS estimate for 2001, which is consistent with our longer-term business model," he said. Analysts currently think sales will grow 9.7%, and earnings will climb 9.7%, in 2001. IBM has told Wall Street to expect it will maintain double-digit percentage earnings growth, and percentage sales growth in the high single digits.

IBM pulled out the usual tactics to bolster earnings per share. Expenses decreased as a percentage of revenue. And the company spent about $1.3 billion buying back its own stock, which helps earnings per share. But for now, it's just what the market ordered. Shares of IBM have been trending higher in the weeks coming into Wednesday's earnings release, having risen around 20% in April. Investors have embraced the thing about Big Blue for which critics have pounded it during the past few years of hypergrowth in select technology groups: its extreme diversity, and its great exposure to the mainframe business, an industry on which IBM holds a virtual lock, and which produces a stable stream of recurring maintenance and service revenue.

Earlier Wednesday, IBM competitor Hewlett-Packard (HWP Quote) warned that it would miss already lowered earnings estimates for its second quarter ending this month.

Amid the general enthusiasm engendered by a surprise interest-rate cut by the Federal Reserve and a guardedly positive outlook from Intel (INTC Quote), IBM shares rallied Wednesday ahead of the earnings release, rising $6.80, or 6.8%, to $106.50.

Emboldened further, investors were sending IBM's shares even higher in after-hours trading. The stock was changing hands on Island at $113.01.