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Sales Are Stagnant, but I.B.M. Earnings Beat Analysts’ Expectations
I.B.M. is a tale of two growth stories. Revenue is anemic, but earnings are robust.
That has been the pattern for I.B.M. in recent years, and its first-quarter results on Tuesday were an emphatic example. The company’s earnings easily surpassed Wall Street’s expectations, but sales were flat.
The focus on earnings and not revenue growth reflects the company’s strategy of shifting into higher-margin businesses, while pruning less profitable operations, and steadily whittling costs throughout the corporation. I.B.M. is confident enough that the trend will continue this year that it raised its profit guidance for the year from “at least $14.85” to “at least $15.00” a share.
I.B.M. is the largest global supplier of information technology — hardware, software and services — to corporations and governments, so it is seen as a bellwether of technology spending trends.
I.B.M.’s quarterly performance and outlook for the year may provide some measure of reassurance for a technology sector that is facing the challenges of a weak European economy and an uncertain outlook in the United States.
Earlier this month, Gartner, the research firm, cut its growth forecast for worldwide information technology spending in 2012 to 2.5 percent, from 3.7 percent. And I.B.M.’s failure to deliver revenue growth, analysts say, could confirm the softening of demand.
In after-hours trading, I.B.M.’s shares fell 2.4 percent. During regular trading, its shares rose $4.73, or 2.33 percent, to $207.45. In the last year, I.B.M.’s shares have gained about 25 percent.
The company reported that its first-quarter net income rose 7 percent, to $3.07 billion. Its operating earnings rose 9 percent, to $3.3 billion, and its operating earnings rose 15 percent, to $2.78 a share. I.B.M.’s program of regularly buying its own stock results in fewer shares outstanding than a year ago.
The quarterly earnings per share were well above the $2.66 estimate of Wall Street analysts.
I.B.M.’s revenue was stagnant, at $24.67 billion, falling short of analysts’ forecast of $24.8 billion.
This is the first financial quarter in the tenure of Virginia M. Rometty, who became I.B.M.’s chief executive at the start of the year, succeeding Samuel J. Palmisano, who was at the corporate helm for the nine previous years and is now chairman.
No major changes in I.B.M.’s strategy, analysts say, are expected anytime soon under Ms. Rometty. In recent years, I.B.M. has moved into more profitable niches of the services and software businesses, while shedding hardware businesses where competition was fierce and profits slender, like personal computers and disk drives.
It has aggressively expanded its global footprint, pursuing growth opportunities abroad and tapping pools of lower-cost skilled workers, especially in India. Major share buyback programs have increased earnings per share, by reducing the number of shares outstanding.
“We’re going to see the same playbook from Ginni Rometty as we saw from Sam Palmisano,” said A. M. Sacconaghi, an analyst for Sanford C. Bernstein.
With its shift to higher-margin businesses and rapid expansion in emerging markets like China and India, I.B.M. has largely escaped the cyclical swings of the technology industry. The company’s profits increased throughout the financial crisis and recession.
The first quarter displayed how the breadth of the company’s business serves to deliver steady profits. The weakness in the hardware business was offset by higher profit margins in services and strong growth in emerging markets.
Hardware sales fell 7 percent, to $3.7 billion, pulled down by lower sales of mainframe and large Unix data-serving computers, compared with the previous year when new models had recently been introduced. But that falloff was more than offset by modest growth and higher profit margins in I.B.M.’s big software and services business.
I.B.M.’s big services business, which accounts for 57 percent of its revenue, more than $15 billion in the quarter, grew a scant 1 percent. But the profit of the services business rose 11 percent.
The software unit grew by 5 percent, to $5.6 billion, while profits in that high-margin business increased 12 percent. The software business generates 43 percent of the company’s profit.
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