IBM Hangs Tough (Update)

SAN FRANCISCO -- IBM (IBM) expects to meet full-year earnings estimates, the company emphasized during its third-quarter earnings call late Thursday.

The company's confidence that it can deliver earnings of "at least" $8.75 a share implies fourth-quarter earnings of $3.07. Analysts were expecting fourth-quarter EPS of $3.06 on revenue of $25.9 billion, according to Thomson Reuters.

IBM financial chief Loughridge sought to dispel fears on the cal that the company would lose revenue from troubled banking clients, face a credit crunch, or suffer a serious downturn due to an economic contraction.

Although financial institutions account for 28% of IBM's revenue, only 1% comes from the 21 financial institutions worldwide that have been identified as troubled, according to Loughridge.

And he reassured investors that the company won't run dry of working capital any time soon. "We have a strong liquidity position," including $10 billion in cash, $4.5 billion of commercial paper with rates that are "well under Libor" -- and an untapped backup revolving credit facility of $10 billion.

Last week, IBM raised an additional $4 billion in term financing, he said. "We are not reliant on the short-term commercial paper market to fund the business."

As for a market slowdown, "we would have to have major markets fall off much more significantly, and we just don't see that in the data," Loughridge said. He pointed to higher short-term contract signings and a good pipeline.

"We'd have to see a dramatic slowdown in our emerging countries," where the company is still seeing high double-digit growth.

In the services business, the company has already closed 65% of its fourth-quarter forecast deals, Loughridge said. The head of the software unit reported seeing "the best pipeline he's ever had," Loughridge said. "On volume, it's up 8% year over year. On a dollar basis, it's up 18%."

Shares in the Armonk, N.Y. tech giant were recently up $2.18, or 2.4%, to $93.70 in after-hours trading.

In the third quarter, IBM's hardware division did suffer a setback, primarily due to 18% lower revenue on industry-standard x86 servers.

Revenue in the Systems and Technology Group fell 9.5% year over year to $4.4 billion. The group's revenue is based on sales of hardware systems.

"Industry standard equipment is not where we have the opportunity to show our value-add," Loughridge said. Storage system revenue also dropped 3% year over year. "As we go into fourth quarter, we have the opportunity for improved margins on x86," he said.

Server competitor Dell ( DELL) likewise warned of a decline in PC demand in the first half of September.

IBM scores higher margins on its premium equipment, such as the latest System z mainframe, on which revenue rose 25% year over year.

IBM's software group had the best quarter overall, at 11.8% growth year over year to $5.2 billion. The group benefits from sales of mainframes with follow-on sales of database software and middleware.

The services business lines, which includes consulting, technology integration and outsourcing, grew 7.9% year over year to $14.8 billion.

Services contract signings of $12.7 billion was 4% lower year over year, while short-term services signings rose 13%, reflecting a shift in corporate spending patterns to covering only immediate business needs.

When it preannounced earnings on Oct. 8, Big Blue revealed that its top line came up short of analysts' expectations, while beating the Street's earnings estimate. The company earned $2.05 a share, up 22% year over year, on revenue of $25.3 billion in the quarter. Analysts had been expecting EPS of $2.01 on revenue of $26.5 billion.

Net income rose 20% to $2.8 billion, from $2.4 billion, or $1.68 a share, in the year ago period.

Gross margin rose to 43.3%, from 41.3% for the same quarter of last year. The company spent $2.7 billion to repurchase shares on a cash basis.

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