International Business Machines Corp. (IBM:US), the world’s biggest computer-services provider, raised its full-year earnings forecast after posting a 7.1 percent increase in first-quarter profit, helped by software margins.
Operating earnings will increase to at least $15 a share this year, IBM said today, boosting its January forecast of at least $14.85. Analysts predicted $14.92, the average of estimates compiled by Bloomberg. The company also reported revenue for last quarter that fell short of projections.
IBM is making progress with a plan to make software, which is more profitable than hardware, account for half of earnings as businesses and governments boost spending on programs that analyze data and project trends. Consulting was hurt by Japan’s recovery from last year’s earthquake and tsunami, as well as constrained government budgets all over the world, Chief Financial Officer Mark Loughridge said today.
“The major markets continued to be weighed down by Japan and by the public sector, which declined more sharply this quarter” in terms of business services demand, Loughridge said on a conference call. “The growth markets continued to perform well, with double-digit growth again this quarter.”
Loughridge reiterated that he expects the company’s performance to improve in the second half.
“The top line and likely the bottom line should be stronger in the second half,” Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co., said in a phone interview after the earnings release. “The comparisons get a lot easier and they are going to have some benefits from the cost cutting,” said Sacconaghi, who has a market perform rating on the stock.
IBM fell 2.4 percent to $202.56 in extended trading, after rising 2.3 percent to $207.45 at the close. Last month, the Armonk, New York-based company’s shares (IBM:US) closed above $200 for the first time, factoring in stock splits.
Sales increased 0.3 percent to $24.7 billion, compared with the $24.8 billion analysts predicted. Net income advanced to $3.07 billion, or $2.61 a share, from $2.86 billion, or $2.31, a year earlier. Earnings excluding some items rose to $2.78 a share from $2.41. Analysts predicted $2.65.
Revenue from Europe, Middle East and Africa declined 2 percent to $7.6 billion, while sales in the Americas and Asia- Pacific region increased.
The effect on IBM’s revenue growth from Europe’s debt crisis may worry some investors, said Joseph Foresi, an analyst at Janney Montgomery Scott LLC in Boston, who has a buy rating on the company.
The euro averaged $1.31 in the first quarter, down 4.2 percent from the year-earlier period as Europe’s financial woes continued. The drop means revenue from Europe, which combined with Middle East and Africa accounts for about a third of IBM’s sales, is worth less when converted to dollars.
Chief Executive Officer Virginia “Ginni” Rometty, who took over in January, is also seeking to expand in faster- growing economies. Revenue from growth markets, such as Brazil, India and China, increased 9 percent in the first quarter. Sales from the regions will make up at least 30 percent of revenue by 2015, the company has said, up from 22 percent in 2011.
Formerly IBM’s sales and marketing head, Rometty, 54, succeeded Sam Palmisano and became the first female CEO in the company’s 100-year history. Palmisano, who had been CEO since 2002, remains chairman.
Rometty inherited a five-year plan that targets annual operating earnings of at least $20 a share by 2015, up from $13.44 last year. IBM is tapping a “gusher of data” through its Smarter Planet and Smarter Commerce initiatives to achieve its 2015 growth targets, Rometty said in her first letter to shareholders in the 2011 annual report.
Sales at IBM’s software unit rose 5.5 percent to $5.6 billion. Services revenue growth slowed to 0.7 percent from the fourth quarter’s 3 percent, while hardware sales declined 6.7 percent.
Backlog, which measures expected future revenue from contracts, totaled $139 billion in the quarter, down $2 billion from the fourth quarter. Contract signings for services (IBM:US) were $11.8 billion. Mark Moskowitz, an analyst at JPMorgan & Chase Co., projected $11.1 billion.
IBM has set goals of adding $20 billion in new revenue and spending about $20 billion on acquisitions, from 2010 through 2015, as it expands offerings to business customers.
Loughridge today reiterated that acquisition goal on a conference call, and said IBM spent $1.3 billion in the first quarter closing purchases of five companies, including DemandTec Inc.
IBM is selling its point-of-sale terminal business for about $850 million to Toshiba Tec Corp. (6588), the Japanese maker of scanners and bar-code machines, the companies said earlier today. That deal is a “partnership” that will allow IBM and Toshiba to combine some offerings in commerce, Loughridge said.
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