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IBM posts profit, flat revenues

The computing giant's shares jump nearly 6.5 percent after the company reported a small rise in quarterly profits.

IBM shares jumped nearly 6.5 percent in early trading this morning after the company yesterday reported a small rise in quarterly profits.

Some analysts increased their recommendations and earnings estimates for Big Blue this morning, citing expectations that its business may show further improvement down the line.

Morgan Stanley Dean Witter analyst Tom Kraemer upgraded IBM to a "strong buy" from "outperform." Robertson Stephens also upgraded Big Blue, to a "buy" from a "market performer," and raised its earnings estimates for fiscal 1998 to $6.55 a share, up from $6.31 a share. Estimates for fiscal 1999 were raised to $7.50 a share from $6.75 a share.

The comapny reported net income of $1.5 billion, or $1.50 a share, compared with $1.4 billion or $1.43 a share a year ago. This morning IBM shares were at $129.69, rising from the yesterday's close of $122.

Wall Street had been expecting IBM to post profits of $1.49 per share for the quarter, according to a consensus of analysts by First Call.

Though the company's profits nudged past analysts' expectations, its revenues were flat as it continues to be affected by pricing pressure and turmoil in Asia.

The company had cited similar problems in its first quarter, when it recorded its first drop in year-to-year quarterly profits in nearly two years. Although IBM said it expected the weakness in the Asian economy to ease after it posted first-quarter results, the situation apparently had not stabilized enough. IBM also cited excess PC inventory and price pressure among DRAM chips as a factor that affected its bottom line.

Revenues were $18.82 billion, compared with $18.87 billion posted a year ago. IBM chairman and chief executive Lou Gerstner said in a statement that the company remains cautious about Asia and the DRAM outlook, but he said later that IBM's outlook appears bright as PC inventory declines among its resellers and demand for its new, higher-performance System/390 servers, scheduled to ship in August, picks up.

Doug Main, IBM CFO, on Q2 results
Analysts had been waiting to see if Big Blue's faster-growing business segments could push its overall revenue growth beyond the single digits.

"The growth in services, in many respects, is incredible...And the backlog grew over $1 billion to record levels and we've been able to be more discrimate than we've ever been in terms of the contracts that we achieve," said Douglas Maine, IBM's chief financial officer. "Overall, we're absolutely committed to double-digit revenue growth and I'm sure we'll achieve it."

The computer giant saw its services business, which accounts for nearly one-third of its overall revenues, increase 22 percent, to $5.6 billion, over the same period a year ago.

Services have been a booming business for IBM, and are a key part of the company's growth strategy. Maine added that there is no sign that growth in the services business is slowing down.

IBM has been winning larger services bids lately than it has historically, and during the past quarter scored nine contracts worth over $100 million each.

But hardware sales have not fared as well. Revenues from this business segment fell by 13 percent to $7.5 billion, compared with a year ago. Personal computers and RS/6000 revenues declined, as well as System/390 revenues. IBM attributed the System/390 declines as the line gets a product transition, and year over year price reductions. And in the previous quarter, Big Blue racked up $7.1 billion in hardware revenues.

David Takata, an analyst with Gruntal & Co., said IBM's hardware business didn't take as big of a hit as he had expected.

"I thought they would take a big hit on hardware with the introduction of the G5 and [problems with] Asia Pacific," said Takata. "I'm pleased it's not as bloody as I expected."

He also noted, however, that the company is still in transition with its RS/6000.

Software revenues, which have remained virtually flat for the past year on a sequential basis, increased 5 percent over the same period a year ago during the quarter, to $3.2 billion. IBM's DB2 database software, AS/400 software, and Tivoli systems management software were among the top software revenue drivers.

Maintenance revenues fell by 9 percent from year-ago figures, to $1.5 billion.