Bloomberg News

IBM Gains as Software Shift Helps Forecast Beat Estimates

January 23, 2013

International Business Machines Corp. (IBM:US), the world’s biggest computer-services provider, rose the most in a year after forecasting profit that exceeded analyst estimates.

Earnings in 2013 will be at least $16.70 a share, Armonk, New York-based IBM said in a statement yesterday. That compares with the $16.64 average estimate of analysts tracked by Bloomberg. The shares gained 4.4 percent to $204.72 at the close in New York, the biggest gain since Jan. 20, 2012.

Chief Executive Officer Ginni Rometty is shifting away from hardware to more profitable businesses such as cloud computing, a service that provides remote access to information. The company is also looking for more growth from developing markets such as Africa to help meet its target of $20 in earnings a share by 2015.

“The emerging-markets revenue stream is growing, and cloud was growing very fast,” said Laurence Balter, an analyst at Oracle Investment Research in Fox Island, Washington. “The market is rewarding numbers better than expected across the board.”

Fourth-quarter income, excluding items such as amortization and pension costs, rose to $6.1 billion, or $5.39 a share.

The move to boost margins hasn’t helped increase sales (IBM:US), which slipped about 1 percent to $29.3 billion. That compares with the $29.1 billion average estimate of 21 analysts surveyed by Bloomberg.

Little Growth

Annual revenue has remained close to $100 billion since 2007, ending last year at $104.5 billion. Sales will reach about $106 billion this year, according to analysts’ estimates.

“I don’t expect IBM to continue to soar like it did in the last couple years,” said Balter, who has the equivalent of a neutral rating on the shares and a price target of $195. The shares have more than doubled since the end of 2008, compared with a 65 percent gain for the Standard & Poor’s 500 Index.

Still, there were signs of progress in some of the areas Rometty has identified as keys to growth. Cloud-computing sales climbed 80 percent last year, Chief Financial Officer Mark Loughridge said yesterday on a conference call, without providing a total figure. Emerging-market revenue increased 4 percent, with combined sales from Brazil, Russia, India and China climbing 7 percent, IBM said.

Rometty may also get help from IBM’s more traditional divisions as clients invest in more projects. Sales in the consulting unit known as Global Business Services will improve this year after falling 4 percent to $18.6 billion in 2012, Loughridge said.

Five-Year Plan

Rometty succeeded Sam Palmisano in January of last year to become the first female CEO in the company’s 101-year history. She helped put in place a five-year plan to draw most profit from software by 2015.

“She had some big shoes to fill, and expectations were very high,” said Josh Olson, an analyst at Edward Jones & Co. in Des Peres, Missouri. “This could be characterized as an adjustment year, one where she is mapping her course, and it’s largely been similar to what we’re used to from IBM.”

Last year, Rometty divested (IBM:US) the retail hardware business, purchased software and data analysis providers, and added cloud computing technology. IBM has also been trying to squeeze out more revenue from its consulting contracts while seeking new deals in emerging markets.

Buying Companies

Acquisitions last year totaled $3.7 billion for 11 companies, including $1.3 billion for Kenexa Corp., a company that uses social networking to help businesses handle human resources and recruiting. The company has said it plans to spend $20 billion on acquisitions between 2011 and 2015.

IBM’s services backlog -- its expected future revenue from contracts -- reached $140 billion in the quarter, compared with $138 billion in the third quarter. Contract signings for services, which make up about 60 percent of IBM revenue, fell 12 percent from a year earlier to $17.9 billion.

To contact the reporter on this story: Sarah Frier in New York at sfrier1@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net


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Companies Mentioned

  • IBM
    (International Business Machines Corp)
    • $161.82 USD
    • -0.42
    • -0.26%
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