IBM slips despite solid quarter

The computing giant beats estimates but sees its stock drop in a contract slowdown.

By Kim Peterson Oct 18, 2010 5:54PM
Eight lousy days. That's all that came between IBM (IBM) and a great third-quarter earnings report Monday.

The company beat expectations and saw remarkable growth in the emerging markets that are in economic recovery. Software and hardware sales were on fire.

But customers still weren't hiring IBM for large consulting projects, and services signings fell -- enough to drag shares down 4% in after-hours trading. But here's the kicker: Eight days after the quarter ended, IBM signed a $1.8 billion deal that pushed services signings back into positive territory.

So you can't blame executives for being a little frustrated on that point. "If we had this signed on (Sept.) 30th, we wouldn't be having this conversation," said chief financial officer Mark Loughridge in a conference call with analysts Monday.

The company was so sensitive about this, in fact, that it addressed the issue in its earnings press release. Yes, outsourcing signings were down 14%, the company said. But if you include the Oct. 8 agreement, signings would have been up 14%.

OK, OK, we get the point. Let's look at the rest of the quarter.

Profit. Net income jumped to $3.6 billion, up 12% from $3.2 billion in the year-ago period. Earnings per share rose 18% to $2.82. Analysts were expecting $2.75 a share.

Revenue. The company saw an increase of 3% in the quarter to $24.3 billion. Adjusting for currency, the increase was 4%.

Margin. Net margin was up 1.1 points to 14.8%.

Guidance. IBM upped its full-year profit guidance to "at least" $11.40 a share. The "at least" is meaningful here because it's the third time the company has boosted earnings expectations this year. Could we see another raise in the near future?

The real success in the quarter was business in BRIC (Brazil, Russia, India and China) and other growth markets. IBM said BRIC revenue was up 26% adjusted for currency, while other growth markets saw a 13% currency-adjusted increase.

So far this year, IBM has opened 40 sales offices in growth markets, bringing the total to 103. And revenue from these growth markets contributed 21% to the total.

"We called the right play going after the growth markets with strong investment content," Loughridge told analysts. As far as economic recovery goes, "the growth market's simply out of the box faster than the majors."

So there was much to crow about for IBM, but analysts seemed to focus on that drop in services. "Investors are likely to key in on IT-services signings being a bit below expectations,” one Edward Jones analyst told Bloomberg. “It’s a key measure of deal activity.”

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