IBM lifts profit forecast after sales jump

IBM raised its earnings forecast for the year as it reported a 12 per cent surge in second-quarter revenues, surpassing Wall Street expectations.

“In the second quarter, our long-term strategic investments in the company’s growth initiatives again helped drive strong revenue performance,” said Samuel Palmisano, IBM chief executive, on Monday. “Hardware, software and services revenue grew at double digits, and we achieved strong profit and free cash flow growth.”

Net earnings rose 8 per cent to $3.7bn as the company reported $26.7bn in revenue, $1.35bn more than had been expected by analysts. IBM lifted its full-year earnings forecast to at least $13.25 a share, ahead of analysts’ average estimate of $13.21.

The company’s shares rose 3 per cent in after-market trading to $178.30.

Software sales rose 17 per cent compared with the same period of last year, to $6.2bn. Hardware sales also rose 17 per cent, to $4.7bn, driven mainly by a 61 per cent increase in mainframe server products.

Mark Loughridge, chief financial officer, said growth was due mostly to upgrades in the regular product-refresh cycle, rather than new sales, but emphasised that the company brought in 68 new mainframe customers who can later be sold other IBM services.

“Goodness gracious, when you’re up 61 per cent, that’s a pretty powerful quarter in the mainframe business,” he said.

The company is in the midst of a long-term transition toward more profitable lines of business, with a focus on software and services. The years-long effort has already seen IBM eliminate its hard disk drive, personal computer and printing units.

The company aims to reach operating earnings per share of $20 by the end of 2015, with software contributing half the company’s profits and emerging markets revenues approaching 30 per cent of total revenues. IBM said it will invest $20bn in acquisitions between 2011-15.

Revenues in Brazil, Russia, India, and China increased 27 per cent in the second quarter, with the company announcing several contracts and collaborations in Africa. Overall, so-called “growth” markets represented 22 per cent of IBM’s total geographic revenue.

“We’re seeing real strength in growth markets with a lot of opportunity,” Mr Loughridge said. “I think we have a pretty strong hand.”

“Going into the back half of the year, you’ll see some yield against that restructuring,” Mr Loughridge said. “I feel confident that the margin performance is going to be improved in the second half of year.”

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