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.

Samsung Cuts Its Forecast as Sales Growth Slows for Its Costliest Smartphones

Samsung, the largest maker of consumer electronics, said on Friday that it expected weaker profit and revenue, which analysts attributed to slowing sales of high-end smartphones. This is a trend that also bedevils Apple, its main rival.

Samsung, the No. 1 maker of mobile phones, aims its Galaxy models at the top end of the market. Apple sells its iPhone to these customers, too. And while sales of smartphones continue to grow over all, the rate of increase for the more expensive devices has been easing in recent months.

In recent days, BlackBerry and HTC, the Taiwanese phone maker, have also reported difficulties selling advanced smartphones.

In the United States, more than 58 percent of adult consumers who own cellphones own a smartphone, according to comScore, a market research firm. Only three years ago, it was 20 percent.

Rival smartphone makers like Sony and HTC have mounted a renewed challenge with their latest handsets. But for Samsung, the real problem may be that much of the growth in smartphone sales in coming years will be at the lower end of the market, where Chinese manufacturers are gaining share. Samsung simply does not have the most appealing models for those consumers. As smartphones become increasingly commoditized, prices will fall and profit margins will shrink.

“The concern is the future of the smartphone market, which is already saturated at the high end,” said C. W. Chung, an analyst at Nomura Securities. “The smartphone industry may be becoming more like the PC industry,” in which consumers make their buying decisions mostly on price, despite attempts by manufacturers to differentiate their products.

Samsung said it expected to post an operating profit of 9.5 trillion won, or $8.3 billion, for the second quarter, a 47 percent increase from a year earlier.

While many companies would envy such a growth rate, the forecast disappointed financial analysts, who had, on average, expected Samsung to post operating profit of more than 10 trillion won in the quarter.

Even before the news on Friday, some analysts downgraded their forecasts for Samsung. Investors have taken heed, and Samsung Electronics shares are down about 17 percent since the start of the year. (Apple shares are down about 21 percent in the same period.) Samsung shares dropped 3.8 percent on Friday in trading in Seoul.

In April, Apple reported its first year-over-year decline in quarterly earnings in a decade, as iPhones sales showed signs of slowing. The company sold 37.4 million iPhones in its fiscal second quarter or about 2.88 million phones a week.

Samsung’s Galaxy S4 got off to a quicker start than its predecessor model, the S3. It took only 60 days to sell 20 million S4 handsets, a slower pace than the older iPhone, but still far faster than the 100 days it took Samsung to sell that many Galaxy S3 phones.

While Samsung is also the world’s largest television maker, profit margins in that business have been squeezed by competition. So Samsung remains highly dependent on its mobile division, which delivered three-quarters of the company’s operating profit in the first quarter.

Samsung’s overall estimated revenue grew strongly in the second quarter, rising 20 percent, to 57 trillion won. But that, too, was slightly below expectations.

“With Samsung, the market had gotten used to upside surprises,” Mr. Chung of Nomura said. “But the previous quarters were abnormal. People need to adjust their focus.”

In March, Samsung introduced the Galaxy S4 amid considerable fanfare at an event at Radio City Music Hall in New York. While the new model has sold well in the United States, now at a carrier-subsidized price of $200, it has not performed as strongly as some analysts expected. It sells in China for about $850.

The cost of Samsung’s heavy marketing — it is a bigger worldwide advertiser than Coca-Cola — has eaten into profit margins. It also has the expense of opening Samsung shops inside more than a thousand Best Buy stores in the United States.

The high-end phone makers faced another profit-margin problem. As lower-price smartphones get more sophisticated and the advantage of higher-price smartphones is reduced, more people may shift to those lower-price phones, putting increased price pressure on companies like Samsung or Apple.

Mark Newman, an analyst at Sanford C. Bernstein in Hong Kong, says he thinks investors became too pessimistic about Samsung. Profit margins will rebound in the second half of the year, he said. “At current valuations, the market is assuming the mobile business will destroy value,” he wrote in a note to clients. “We believe Samsung is cheaper than ever.”

Some analysts noted that even if smartphone profit margins fell and Samsung faced greater pressure from rivals, it could benefit because it is the biggest producer of the semiconductors used in smartphones and other computing devices. Prices of memory chips have also been rising in recent months after a long slump.

Samsung plans to post its official report of second-quarter earnings on July 26.


Follow me on Twitter @sajilpl

Gartner downgrades 2013 global IT spending forecast on currency shifts

Gartner has lowered its expectations for growth this year in global IT spending, saying it will rise 2 percent to $3.7 trillion. Earlier this year, the analyst firm predicted 2013 growth of 4.1 percent.

The reduction "mainly reflects the impact of recent fluctuations in U.S. dollar exchange rates," Gartner said Tuesday.

Predicted weaker sales for devices played another role in Gartner's downgrade, analyst and managing vice president Richard Gordon said in a statement. Gartner had previously forecast 7.9 percent growth in device revenue, but has now dropped that estimate to 2.8 percent due to continued decline in PC sales.

"While new devices are set to hit the market in the second half of 2013, they will fail to compensate for the underlying weakness of the traditional PC market," Gartner said in a statement.

Meanwhile, tablet sales are expected to grow 38.9 percent and mobile phones 9.3 percent in 2013, according to the announcement. Overall, device revenue will total $695 billion in 2013, Gartner said.

Enterprise software revenue is expected to show the most strength, rising 6.4 percent this year to $304 billion, driven by higher demand for CRM (customer relationship management) software.

Data center systems sales will rise 2.1 percent to $143 billion and IT services revenue is set to jump 2.2 percent to $926 billion, both slightly higher growth rates than in 2012, according to Gartner.

The largest segment in Gartner's survey, telecom spending, will rebound this year, growing 0.9 percent to $1.65 trillion. "Fixed broadband is showing slightly higher than anticipated growth," Gartner said. "The impact of voice substitution is mixed as it is moving faster in the consumer sector, but slightly slower in the enterprise market."

Last year, telecom spending fell 0.7 percent.

Gartner is planning to discuss the forecast in more detail during a webcast July 9.