Revenue Falls, but Profit Tops Forecast at I.B.M.

The company’s software delivered a strong performance, profit margins rose, and new contract signings in its major services like data analysis rose sharply — an encouraging sign of future business. But its hardware business continues to struggle.

 
“The results are positive compared to earnings expectations,” said A. M. Sacconaghi, an analyst at Sanford C. Bernstein. “But it’s mixed.”

 
I.B.M. and investors focused on the positive side. The company raised guidance for earnings per share for the year by 20 cents to “at least $16.90 a share.”

 
In after-hours trading, I.B.M. shares rose 2.6 percent, or more than $5. The stock closed the regular trading session up 70 cents at $194.55.

 
The company’s net income fell 17 percent, to $3.2 billion, or $2.91 a share, compared with nearly $3.9 billion in the year-ago period. That includes a charge of about $1 billion for trimming its work force. I.B.M. announced in April that it would take that charge this quarter and that most of the affected workers would be outside the United States.

 
In recent years, I.B.M. has taken annual charges that average several hundred million dollars for what it calls “work force rebalancing.” The company sheds workers in higher-cost nations and in businesses that are being trimmed, and it adds employees elsewhere, especially in India.

 
I.B.M. says the process reflects both financial discipline and globalization as it hires and invests in faster-growing markets. The net effect has been an expansion of its global work force to more than 430,000.
What is mainly different this time, analysts say, is that the work force charge is being taken in a single quarter rather than being spread across an entire year. The company’s operating earnings, which exclude the charge for work force cuts, rose 3 percent, to $4.3 billion, or $3.91 a share. The result was well above the average analyst estimate of $3.77 a share, according to Thomson Reuters.

 
Operating earnings per share rose 8 percent, reflecting fewer shares outstanding, because I.B.M. steadily buys back its own shares. Revenue fell 3 percent, to $24.9 billion, below the Wall Street forecast of $25.4 billion.

 
I.B.M. is the largest supplier of information technology — hardware, software and services — to corporations and government agencies worldwide, and its results are watched as a guide to broader trends in business technology spending.

 
Globally, the growth in technology spending has softened, as once-hot markets like China and Brazil cool and Europe remains in an economic slump. For I.B.M., the China business was soft, but Brazil did well, Mark Loughridge, I.B.M.’s chief financial officer, said in a conference call.

 
I.B.M. has met the challenge of economic turmoil and new waves of technology more nimbly than most of its established rivals. It moved quickly to expand in emerging markets, shift to higher-profit products and services, and cut costs.

 
But in the first quarter of this year, I.B.M. reported disappointing earnings, below analysts’ forecast for the first time since early 2005.

 
Businesses that I.B.M. has earmarked for growth are thriving. One of these is software and services for mining vast amounts of data from the Web, sensors and smartphones, to be used to find ways to increase sales or cut costs.

 
But the question for established companies like I.B.M. is whether newer, more profitable businesses can grow fast enough to offset the competition from emerging rivals and new technology.

 
A prime example is cloud computing, a fast-growing market for computing sold to businesses as a service over the Internet. The low-cost cloud model threatens traditional technology suppliers. Amazon is the early leader in the cloud business.

 
I.B.M. is investing in cloud computing. Last month, it announced plans to buy SoftLayer Technologies, a cloud computing company, in a deal valued at about $2 billion.

 
“I.B.M. is making strong plays in new technologies like cloud, but the question is whether it is moving fast enough,” said Frank Gens, chief analyst at the International Data Corporation, a research group.
In the past, I.B.M. has also aggressively pulled out of areas with declining margins, like its personal computer business, which it sold to Lenovo in 2005.

 
Recently, I.B.M. has talked to Lenovo about a deal for I.B.M.’s unit that sells so called industry-standard data center computers, typically powered by Intel chips, analysts say. Talks apparently broke off in May, when the two sides could not agree on a price. But Mr. Loughridge said I.B.M. was in “active discussions.” That business represents about $5 billion in sales for I.B.M., but competition is fierce.

Markets stable after sharp falls

21 June 2013 Last updated at 21:33 GMT Continue reading the main story Last Updated at 06:22 GMT
Market indexCurrent valueTrendVariation% variationMarkets regained ground in US afternoon trading, ending a 48-hour slide sparked by comments by the US Federal Reserve.

On Wall Street, shares ended Friday fractionally higher, after recovering from falls earlier in the day that saw European markets close 1%-2% lower.

It came after markets fell sharply on Thursday, a day after the Fed said it may rein in its stimulus programme.

However, on Friday a dissenting member of the Fed's policy committee sharply criticised the statement.

After an official blackout on discussion of the meeting expired, James Bullard, president of the St Louis Fed, said in a statement the Fed's decision to announce details about when it would trim its bond-buying programme was "inappropriately timed".

Mr Bullard said it was a mistake to raise market expectations of an imminent wind-down of the programme.

Explaining his decision to dissent from the central bank's policy decisions for the first time, he claimed the move would damage the Fed's credibility at a time when core inflation - a proxy for long-term inflation trends, currently running at 1% - was well below the Fed's 2% target.
Hawkish tone
The Fed has been trying to support the weak US economy by buying bonds at a rate of $85bn (£54bn) a month, throguh a programme known as quantitative easing (QE).
Continue reading the main story

What's currently worrying global investors isn't just that the Fed seems poised to stop manufacturing all that almost-free money, it is that this could happen at a time when what's happening in China may reinforce a global squeeze rather than counteracting it”

End Quote However, on Wednesday, Fed chairman Ben Bernanke said that if the US economy continued to show signs of improvement then the central bank could start to slow down its bond purchases as early as this year, and end the programme next year.

The bond-buying programme has been seen as a key factor behind the rise in stock markets in recent months, as the cash proceeds from the bond purchases flood through the economy and keep long-term interest rates low.

Another committee member also dissented from the statement, but for the opposite reason to Mr Bullard. Kansas City Fed president Esther George expressed concern that the Fed's bond buying would destabilise financial markets.

Mr Bernanke - who has spent much of his time in office persuading more hawkish colleagues of the merits of QE - was authorised by the Fed's policy-making Open Market Committee to deliver the unusual verbal statement.

Markets reacted to the perceived hawkishness of the committee by significantly bringing forward expectations for when the Fed will start to raise US short-term interest rates from their current historic low of between zero and 0.25%.

Although Mr Bernanke made clear in the statement that the Fed did not expect to raise rates until well into 2015, futures markets priced in a 50% chance of a rate rise by September next year.
China worries
The Dow Jones Industrial Average ended Friday 0.3% higher, partly reversing a 2.3% drop on Thursday - its biggest one-day fall of the year.

Technology stocks did badly, after Oracle announced disappointing results, with the tech-heavy Nasdaq index closing 0.2% lower.

Behind the bearish tone was a rise in long-term interest rates, as markets continue to price in expectations that the Fed will start raising short-term US interest rates sooner than previously thought.

The 10-year yield on US Treasuries - the benchmark for the Federal government's long-term cost of borrowing - rose from 2.41% to 2.54%. In early May it stood at less than 1.7%.

The prospect of higher returns in the US dragged the dollar higher against most other currencies, up 0.7% against the euro, 0.5% against sterling and 0.6% against the yen.

It also drove long-term borrowing costs marginally higher in other countries, including the UK and eurozone.

Another factor that spooked markets on Thursday was news of record high borrowing costs in China this week, raising fears of a Chinese credit crunch and a stalling of the world's growth engine.

However, the apparent stress in the country's banking sector appeared to ease somewhat on Friday as the People's Bank of China intervened.

As a result, commodities markets - in which Chinese demand plays a dominant role - had a somewhat mixed day.

The oil price fell further, with Brent crude futures dropping 1.2% to just under $101 a barrel.

Industrial metals - many of which are intensively used in China's construction boom - were more resilient, with copper rebounding 0.7%.