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IBM's services unit lifts results

The computing company's first quarter rises 8 percent, missing analyst expectations by one penny, despite a boost from its Global Services division.

IBM on Monday reported that first-quarter earnings rose 8 percent, missing analyst expectations by a penny, despite a boost from the company's Global Services division.

IBM's net earnings for the quarter were $1.4 billion, or 79 cents per share, on revenue of $20.1 billion. That compares with earnings of $1.2 billion, or 68 cents per share, on revenue of $18 billion in the same period a year ago.

Analysts expected Big Blue to earn a profit of 80 cents a share, according to a survey by earnings tracking firm First Call.

IBM's shares rose $1.32 before the earnings announcement, closing the day at $80.07.

"IBM Global Services delivered another good quarter with more than $12 billion in signings, our second-best performance in a first quarter," said Samuel Palmisano, IBM chief executive, in a statement.

During the quarter, IBM's Global Services business landed two "mega deals." One was a $2 billion, 10-year contract with auto-parts maker Visteon; the other was a $1 billion, six-year contract with financial services company AXA Group.

"While the services market fundamentals are stable at best, IBM continues to gain share in outsourcing and consulting," said Richard Gardner, a Smith Barney analyst, in a recent report before IBM posted its results. He noted that IBM's acquisition of the consulting arm of PricewaterhouseCoopers last year has particularly helped the computing company's consulting business.

Big Blue's Global Services unit booked $10.2 billion in revenue during the first quarter, up 24 percent, or 15 percent on a constant currency basis, over last year. And IBM also signed contracts worth $12 billion in the first quarter. Revenue from those deals will show up in future quarters. The company has an estimated backlog of global services deals reaching $113 billion. Global services include outsourcing, IT consulting, maintenance and customer support.

"We have had continued success with our PwC integration," said John Joyce, IBM's chief financial officer, during an analyst conference call. "We have regained 110 of the 149 accounts that dropped PwC before our acquisition, due to auditor independence."

Hardware revenue, however, declined 1 percent, or 6 percent at constant currency, to $5.8 billion during the quarter, compared with the previous year. Sales from the zSeries mainframes fell in the quarter, because of customers deferring purchases while waiting for the introduction of the new zSeries mainframe, code-named T-Rex, Joyce said. Shipments of T-Rex are expected late in the second quarter.

Software revenue grew 8 percent, or 2 percent at constant currency, to $3.1 billion in the quarter, compared with year-ago figures. IBM's middleware products received a boost from double-digit sales of the company's e-business on demand software, WebSphere and its database management software, DB2.

But sales of Tivoli and Lotus software did not fare as well in the first quarter. Lotus revenues declined 1 percent, or 8 percent on a constant currency basis, and Tivoli dropped 12 percent, or 5 percent on a constant currency basis.

"Tivoli sales were hit the hardest by customers delaying purchases," Joyce said. "A significant number of deals were delayed into the second quarter."

Nonetheless, Joyce said, IBM remains on track with its financial projections.