IBM hits 3Q earnings estimates but sales disappoint

IBM met the Street estimate in its third quarter Tuesday, earning $2 billion, or $1.08 a share. However, the $21.8 billion in sales came in at the low end of most analysts' estimates.

First Call Corp. consensus pegged IBM (NYSE: IBM) for a profit of $1.08 a share in the quarter.

Ahead of the earnings report, IBM shares closed up $1.88 to $113.

The $21.8 billion in sales marked a modest 3 percent improvement from the year-ago quarter when it earned $1.8 billion, or 93 cents a share, on sales of $21.1 billion.

Most analysts had predicted Big Blue would record sales of between $21 billion to $23 billion in the quarter.

"This was a solid quarter, with earnings per share up 20 percent and an acceleration of revenue growth relative to the first half of the year," said CEO Louis Gerstner in a prepared release. "We would like to have seen more revenue in the quarter, but we were held back by three items."

Gertsner said demand for the company's microelectronics products outstripped its ability to manufacture components. He also said demand for its System/390 servers declined as customers awaited the release of its newer high-end server products. He also said parts of the company's software business slowed "unexpectedly" in September.

On a conference call with analysts, CFO John Joyce echoed Gerstner. While acknowledging IBM was good at the "basic blocking and tackling," Joyce said currency fluctuation, namely a weak euro, took 3 percent off of revenue growth.

Gross profit margins checked in at 35.8 percent, flat with the year-ago quarter. IBM's cash position was halved to $3 billion compared to a year ago due to stock repurchase programs.

Software sales fell 3 percent to $2.9 billion in the quarter, reflecting what the company called "sales execution issues" near the end of the quarter as well as an industry-wide transition in the systems management software marketplace.

Joyce said IBM aggressively hired software sales staff, but productivity was down as these new employees got up to speed. Meanwhile, sales from IBM's Tivoli unit were weak because of a "shift from integrated software to specific solutions." WebSphere was a bright spot with sales jumping 200 percent year-over-year.

Hardware sales improved 4 percent in the quarter to $9.5 billion and its much-maligned PC unit finally turned a profit of $65 million.

Storage revenues were mixed, with high-end disk drive sales, led by its Shark product. Strong sales of its popular microelectronics components helped offset a decline in disk-drive sales.

Services sales jumped 4 percent from the year-ago quarter to $8.2 billion, primarily due to outsourcing services in the Asia-Pacific region. IBM had a services backlog of $81 billion at the end of the quarter. "We continue to see e-business driving demand for services," said Joyce.

Geographically, sales into the Americas inched up 1 percent to $9.7 billion. Sales from the Europe/Middle East/Africa region fell 3 percent to $5.6 billion while sales into the Asia-Pacific region soared up 19 percent to $4.3 million.

Gerstner said the company's broad product catalogue helped the company ride out a particularly rocky quarter.

"This has turned out to be an unusual year for the information technology industry, with many ups and downs," he said. "We expect our broad portfolio will be even more important as we go forward, especially compared to the single-segment companies in our industry."

Last quarter, IBM raked in $1.9 billion, or $1.06 a share, on sales of $21.7 billion.

Its shares moved as high as $134.94 in September after falling to a 52-week low of 89 in November.

Twenty-one of the 22 analysts following the stock rate it either a "buy" or "strong buy."

First Call Corp. consensus expects it to earn $4.45 a share in the fiscal year.