IBM Beats Big

Big Blue blasts the Street's earnings expectations.
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Updated from Oct. 17

IBM

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shares started Wednesday's session at a new 52-week high after the company easily beat the Street's third-quarter earnings forecast and surpassed revenue estimates.

"We had a great quarter and our results demonstrate the balance and strength of our business model," CFO Mark Loughridge said on a conference call with financial analysts after the bell on Tuesday.

"I thought it was very solid," agreed Sushil Wagle, senior vice president of investments at J. & W. Seligman, which holds IBM shares. "It was a very good quarter, and the stock's reflecting that."

Big Blue's stock was recently up nearly 5% in early Wednesday trading, adding $4.22 to $91.17. Earlier in the session, the shares marked a new intraday 52-week high of $91.45.

For its third quarter, the IT services giant said it earned $2.2 billion, or $1.45 a share, compared to $1.52 billion, or 94 cents a year ago.

Including 32 cents a share for a one-time charge of $525 million for repatriation taxes, the company earned $1.26 a share in the year-ago quarter.

The results plowed past the Thomson First Call consensus forecast: analysts had pegged the company for $1.35 a share for the quarter. Loughridge said that the additional 10 cents should be rolled into analysts' estimates for the full year.

IBM reported $22.62 billion in revenue vs. $21.53 billion in the same period last year, above the analyst revenue target of $22.08 billion.

Gross margins rose to 42% from 40.6% in the year ago quarter.

The company's software business was the largest contributor to profit for the quarter, thanks to strong demand across the whole product portfolio, Loughridge said on the call.

Software sales totaled $4.4 billion, rising 9%, or 7% adjusted for currency, compared with the third quarter of 2005.

Revenue from IBM's middleware brands was $3.4 billion, growing 12% compared with the same period last year. WebSphere and Tivoli were the stars, growing at 30% and 44%, respectively (28% and 42% adjusted).

Hardware revenue grew 9%, or 8% when adjusted for currency, to $5.6 billion compared with $5.1 billion a year ago.

Sales of the System Z series was the most impressive, up 25% year-over-year, or 22% at constant currency. System P grew 10%, or 8% when adjusted for currency. Microelectronics was up 29% and storage grew 12%, or 11% at constant currency.

System I, meanwhile, fell 22% year over year, or 23% at constant currency.

"Our hardware and software performance benefited from particularly good sales execution in September in closing key transactions for the quarter," Loughridge said.

Global services, which represents the bulk of IBM revenue, increased 3%, or 2% adjusted for currency, to $12 billion.

"It was a very

good turnaround, I feel. The bookings were not as light as many anticipated, including me," Wagle said. "They were lower than the Street's estimate, but not crazy, not disastrous."

Indeed, last quarter, both the company and analysts alike were

somewhat disappointed with the global services bookings.

"It's still not where it needs to be," Loughridge said. Part of the problem was "we just didn't get (some of) the deals closed in time as a number of opportunities slipped out of the quarter."

Still, he was pleased with the improvement in short-term signings, which were up 9% over the same period last year. Longer-term signings fell 15%.

"Our strong performance is the result of excellent execution and the repositioning of IBM's business model to capture the growth and profit areas of a rapidly changing IT industry," IBM chairman Sam Palmisano said in a statement.