IBM Blows Past Estimates

Updated with fresh stock quote and comments from IBM's post-earnings conference call

IBM ( IBM) blew past analysts' profit estimates in its second-quarter results, raising its 2009 profit target thanks to strong margin performance.

The tech bellwether reported earnings of $2.32 a share, up from $1.97 a share in the same period last year, and well above analysts' estimate of $2.02 a share. The firm's second quarter net income was $3.1 billion, up 12 % on the prior year's quarter.

IBM's sales, however, came in just below Wall Street's forecast at $23.3 billion, down 13% on the same period last year. Analysts surveyed by Thomson Financial were expecting sales of $23.49.

IBM, which competes with Hewlett-Packard ( HPQ) and Sun Microsystems ( JAVA), has been shifting its focus onto high-margin software and services in recent quarters, a strategy which seems to be working.

"As a result of our strategic transformation, we have a very strong business model that is delivering superior earnings, cash, and client value," said Sam Palmisano, the IBM CEO, in a statement. "We are optimistic about how IBM is positioned to make the most of current growth opportunities as well as those that emerge as the economy recovers."

Investors were eagerly awaiting IBM's results for an indication of the tech sector's health, and will be heartened by the firm's second-quarter numbers.

IBM also raised its 2009 earnings guidance from $9.20 a share to at least $9.70 a share. Analysts were expecting $9.15 a share.

Sales of IBM's WebSphere software increased 8% year-over-year, despite a broader decline of 7% across the company's software business. Revenue from IBM's Systems and Technology group, which encompasses servers and storage, plummeted 26% compared to the prior year. The company's total global services revenue fell 12% year over year.

IBM nonetheless grew its software and services pre-tax margins by 8.3 points and 4.1 points, respectively.

"Margins are fuelling our profit growth," said IBM CFO Mark Loughridge during a conference call late Thursday. Software and services helped expand the firm's gross margin by 2 points, he added.

The CFO described the firm's second-quarter performance as "powerful" during the call, particularly its earnings growth.

"This is a record level of EPS for a first, second, or third quarter," he said.

IBM also exited the second quarter with $12.5 billion in cash, according to the company's finance chief.

Shares of IBM rose $1.86, or 1.7%, to $112.50 in afterhours trading.

IBM also expects that its 2010 profit could come in above its initial $10 to $11 estimate. "We're ahead of pace," said Loughridge. "We have got a very strong base as we look at 2009, and much of that advantage will flow through 2010."