IBM says tech rebound is spreading

The tech rebound that took hold late last year is spreading beyond consumers and starting to draw in the large corporate buyers who represent the lion’s share of spending on technology, according to the latest earnings released by IBM on Monday.

Earnings and revenues from the technology bellwether topped Wall Street’s official forecasts for the first quarter of the year, although they failed to meet the more optimistic estimates that had taken hold in recent days and the company’s shares slipped back by about 2 per cent in after-hours trading.

In an uncharacteristic demonstration of confidence that the downturn is over, Sam Palmisano, chief executive officer, raised his forecast for IBM’s earnings per share this year to $11.20, from an estimate given in January of “at least $11”.

The company also predicted that for the second quarter of this year all its main divisions would return to revenue growth, after taking currency movements into account. The moves are unusual for IBM, which does not normally raise guidance early in the year.

While the company’s latest results showed that the declines of last year had come to an end, a return to underlying growth across all its businesses had yet to take hold.

Adjusting for currency fluctuations, revenues in the first quarter were unchanged from a year before, although that marked an improvement from the 5 per cent decline seen in the fourth quarter of 2009. On a reported basis, IBM said that revenues grew by 5 per cent, an acceleration from the the
1 per cent of the final months of last year and a turnround from the 8 per cent decline for 2009 as a whole.

Underpinning the first-quarter recovery was an 11 per cent increase in revenues from IBM’s software business, its most profitable unit, to $5bn.

Adding to IBM’s confidence was the pattern of demand seen so far this year, said Mark Loughridge, chief financial officer. “Our growth rate improved across our brands and across geographies,” he said, with the UK leading the way with an 8 percentage point improvement from the year before.

Another sign that tech markets were improving, he added, was the 18 per cent increase in new contract signings in IBM’s business consulting division, which saw its strongest growth in three years. Such new business indicated that companies were taking a broader strategic view of their businesses, Mr Loughridge said.

However, there were some suggestions that IBM was still facing headwinds. In total, it reported signings of new services contracts of only $12.3bn, some $1.5bn below Wall Street expectations, and its gross profit margin edged up only slightly, to 43.6 per cent.