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Strong services revenue lifts IBM's second quarter

IBM sees healthy revenue from global services and software divisions as it seeks out higher-margin businesses.

IBM on Wednesday reported strong revenue and income growth for second quarter 2007, in a sign that the company has improved profitability in its giant professional services division.

Excluding a one-time gain from the sale of its printing division, IBM reported diluted earnings of $1.50 per share, beating analysts' expectations by 3 cents.

A 10 percent increase in Global Services helped fuel second-quarter revenue of $23.8 billion. Income rose 8 percent to $2.2 billion, excluding an $81 million windfall from the sale of its printing division.

IBM Software--a crucial part of its revenue growth strategy as IBM sees declining hardware revenue growth--saw a 13 percent rise in revenue, 9 percent adjusted for currency, compared with the second quarter of 2006.

Revenue from its Systems and Technology hardware division rose 2 percent, or flat adjusted for currency.

Update: During a conference call with financial analysts, IBM's chief financial officer Mark Loughridge said that the second quarter was one of IBM's strongest in years. He raised IBM's full-year outlook, saying IBM now expects earnings per share to rise between 14 and 15 percent this year.

Loughridge added demand for corporate IT products appears solid around the world.

"I think we saw a relatively improving economy. Not the strength of 2006 but we didn't see the tail-off that we saw in the last month of Q1" continue into the second quarter of this year, he said.

Performance from developing markets, where IBM has invested heavily, were particularly strong, with revenue from India and China growing at over 30 percent. IBM's goal is to double revenue growth from India, China, Russia, Brazil over the next four years.

IBM's services business, which is combating lower-cost competition from outsourcing firms in India, performed well in India, with over 30 percent revenue growth, he noted.

"We're beating the local competition on their own turf," he said.

Loughridge also said that IBM is making good progress on its long-term objectives to increasingly draw profits from software and high-margin services. Software is now IBM's largest provider of profit and the most stable contributor to revenue growth, he said.

Analysts welcomed the news of the strong quarter as IBM's stock climbed over three percent in after-hours trading, the same week that its stock reached a five-year high.

"The pieces of the puzzle are coming together for the company and, as a result, IBM is working to increase momentum and gain market share," said Eugene Zakharov, analyst at Technology Business Research.

"Now that IBM has generated that growth momentum now, it is likely to sustain its growth for some time to come," said Annex Research analyst Bob Djurdjevic.