Street Welcomes Back IBM

Shares are higher following a blowout second quarter.
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Updated from 7:08 a.m. EDT

Wall Street's disillusionment with

IBM

(IBM) - Get Report

lasted precisely one quarter.

Shares of the tech titan were up about 4% in early trading Tuesday to $84.92, completing a circuit that began in April when the company shocked investors with a first-quarter earnings shortfall. There was no such disappointment Monday when IBM topped second-quarter financial targets and said its services unit resumed growing.

First Albany upgraded the stock to buy from neutral Tuesday morning. The results set a solid foundation for second-quarter tech earnings, which include reports Tuesday from

Intel

(INTC) - Get Report

,

Yahoo!

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and

Motorola

(MOT)

The return of growth to the services unit becomes more significant as sales account for half of the technology giant's revenue base. Even if it is only the first quarter out of the past seven that services bookings have increased, it's a start, and CFO Mark Loughridge said the restructuring has set the company up for a healthy future.

"We're pretty confident about this performance, and we feel good about our second-quarter recovery," Loughridge said during a conference call, adding that current estimates for the second half of the year appear reasonable.

IBM reported earnings of $1.83 billion, or $1.14 a share, on sales of $22.3 billion. During the same quarter last year, the company earned $1.73 billion, or $1.01 a share, on sales of $11.3 billion.

The company's results exclude a one-time charge worth 72 cents a share for job cuts and gains worth 45 cents a share for the sale of its PC unit and a 29-cent-a-share gain for a previously announced legal settlement with

Microsoft

(MSFT) - Get Report

. Excluding all one-time items, IBM earned $1.12 a share.

Analysts had expected earnings of $1.03 a share on sales of $22 billion, on average, according to Thomson First Call. These estimates excluded the one-time charges and gains, but included a 10-cent-a-share impact from employee stock options.

Also, IBM restated its results from the same quarter last year to reflect the divestiture of its PC unit, which closed on May 1.

Overall gross margin was 39.4% in the second quarter compared with 36.4% in the second quarter last year, and 36% during the previous quarter. Excluding the PC unit, margins were 40.6% vs. 39.7% in the same quarter last year and 38.7% in the first quarter.

By business unit, services sales rose 6.2% to $12 billion, hardware sales (excluding the PC business) rose 5% to $5 billion, software increased 6.5% to $3.82 billion, and global financing sales dropped 4% to $622 million.

Big Blue's

services unit rebounded from the first quarter, when weakness in the unit resulted in the tech giant badly missing its financial targets and a move to cut up to 13,000 workers from its European services operations. Actual job cuts totaled 14,500, and IBM said it's expecting to save $500 million in expenses in the second half of the year and $1.3 billion in 2006.

Services contract signings totaled $14.6 billion, up from $10 billion in the first quarter. Services backlog rose to $113 billion, up from $110 billion from the previous period. "This performance reinforces our confidence in our business model," said CEO Sam Palmisano.

Hardware sales lagged because of a 24% decrease in mainframe revenue as customers waited for a new and upgraded products. Loughridge said he still expects mainframe sales to book long-term growth in the low-single-digit range.

Currencies affected sales by 2 percentage points in the second quarter, down from a 3-percentage-point impact in the first quarter.