The recovery in business spending on technology, a key driver of broader economic growth, is taking hold more slowly than many investors had hoped, according to quarterly figures released by IBM on Monday.
Optimism about a quicker rebound was stoked last week by strong earnings from Intel. The chipmaker put its performance down to demand from
corporate customers, which account for the lion’s share of spending on technology.
However, IBM’s revenues grew by only 2 per cent in the second quarter of the year, to $23.7bn, half the rate of growth that most analysts had been expecting. The company’s shares fell 4 per cent in after-market trading.
Meanwhile, shares in Texas Instruments dropped 6 per cent, in spite of a 42 per cent bounce in revenue at the second-biggest US chipmaker to $3.5bn. The reaction highlighted the nervous mood on Wall Street, as the company only marginally missed its own recently-raised revenue forecast.
IBM, which is often seen as a bellwether of business spending, denied that the figures pointed to any faltering in the recovery, and put most of the shortfall down to the translation effects of a stronger US dollar.
There was “certainly not a pull-back in [corporate] spending” during the quarter, said Mark Loughridge, chief financial officer. Growth rates across the company’s businesses, and in all parts of the world, had picked up from the first quarter of the year and showed signs of continuing to improve this quarter as well, he added.
Investors were unnerved partly by a 12 per cent decline in the value of new contract signings in IBM’s services division, which accounts for nearly 60 per cent of its revenues.
IBM executives said they believed that the steady recovery was likely to pick up steam in the second half of this year, helped partly by new product cycles in the hardware division. New mainframe computers and high-end servers due to go on sale in the coming months should lead to accelerating growth in hardware sales, which had been held to only 3 per cent in the latest quarter as customers waited for the new products, said Mr Loughridge.
Sam Palmisano, chief executive, said that the hardware products were one of the factors behind a decision to raise IBM’s earnings forecast for 2010 as a whole. The projection was raised to $11.25 a share, close to the $11.27 that most analysts are expecting.
Despite the unease over revenues, IBM more than matched profit expectations in the second quarter as it continued to hold down costs and improve profit margins. The 13 per cent increase in earnings per share, to $2.61, made IBM the only company in the Dow Jones Industrial Average to increase its earnings every quarter for the past three-and-a-half years, said Mr Loughridge. Wall Street had been expecting earnings of $2.58 a share.
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