IBM ( IBM) shares bounced modestly on Wednesday after the company delivered the top- and bottom-line goods with its second-quarter earnings report, but many Wall Street analysts were keeping their enthusiasm in check. Shares of Big Blue recently rallied 3.3%, adding $2.44 to $76.70, after beating EPS by a penny and hitting its revenue numbers. The company said late Tuesday that second-quarter net income rose 14% to $2.02 billion, or $1.30 a share, up from $1.83 billion, or $1.12 a share in the same quarter last year. The consensus estimate pegged the company for $1.29 a share. Sales totaled $21.89 billion, off 2% but up 1% when adjusted for the sale of the company's PC business to Lenovo. Revenue was $22.27 billion a year ago, including $557 million from the last month of the PC business. IBM hit analysts' sales target of $21.89 billion. "Given that the company has missed revenue in 12 of 28 quarters and made EPS in 26 of 28
quarters , IBM achieving both consensus revenues and EPS this quarter in a skittish technology environment will likely be viewed semi-positively by investors," wrote Bernstein analyst Toni Sacconaghi in a Wednesday note. The IT services and hardware giant received positive commentary for its margin improvement and software sales, but analysts were discouraged by weak services bookings and slips in some hardware segments. Sacconaghi cautioned that the sluggishness in services, IBM's cash cow, was disappointing and could foreshadow additional weak revenue growth, especially if signings don't pick up in the second half of the year. Still, he said that the company's valuation is attractive and that earnings should beat consensus for the rest of 2006. He rates the company outperform with a $95 price target. His firm has provided IBM with non-investment-banking-related services over the past 12 months.
IBM's global services revenue totaled $11.9 billion, down 1% year over year. Services signings totaled $9.6 billion, falling 34% from a very strong year ago quarter. "Although long-term signings tend to be uneven, and our short-term signings were up slightly quarter to quarter, the performance fell short of our expectations," CFO Mark Loughridge said in a conference call with analysts on Tuesday after the results. Margins for both global technology services and global business services improved year over year for both divisions. In hardware, IBM's System Z servers did well, growing revenue 7% year over year (6% at constant currency). Thanks to demand in the games processor business, microelectronics revenue grew 45% over the same quarter last year. The company failed to meet customer demand in its System I and System X servers, and it blamed the problems on the
RoHS (Removal of Hazardous Substances) requirement in Europe, which went into effect July 1. IBM said parts and product transitions to meet RoHS standards led to unfilled orders. System I revenue declined 7%, System X was flat, and System P servers fell 10%. One of the bright spots is that IBM boosted its software sales by 5% to $4.2 billion over the parallel quarter. Its WebSphere and Tivoli brands, in particular, were strong, and the company said both gained share for the quarter. Loughridge said the company is on track to meet the consensus estimate for 2006 EPS, but the company's comments on slowing enterprise demand loomed even larger for many analysts, some of whom continued to find the stock attractive. "Although we found management's overall enterprise demand commentary to be less than inspiring, we believe that IBM's improving margin profile and current valuation make for a compelling defensive stock in an increasingly uncertain technology spending environment," Credit Suisse analyst Andy McCullough wrote in a Wednesday note. Still, he trimmed his estimate by a dime for the full-year EPS to $5.90, and cut his price target to $90 from $100. McCullough rates the company outperform. His firm does and seeks to do business with the companies covered in its reports. Yet some want to see more improvement in the company before diving into the shares. JPMorgan analyst Bill Shope noted that while the company's valuation is looking better, "we remain concerned that revenue and profit pressures in the services and hardware segments will intensify in the coming quarters," making it difficult for IBM to outperform its peers. He maintains his neutral rating. JPMorgan has a banking relationship with the company.