IBM earnings beat analyst expectations

IBM earnings beat analyst expectations

Global growth comes from middleware and software segments

IBM beat analyst expectations for the first quarter and the company pointed to its global reach in helping to drive growth despite a challenging market.

First quarter revenue was $US24.5 billion, up 11 per cent compared to the same quarter last year. Analysts expected quarterly revenue of $23.7 billion, based on a consensus collected by Thomson Financial.

Diluted earnings per share were $1.65, up 36 per cent from $1.21 in the first quarter last year. That compares to Thomson's consensus expectation of $1.45.

In the Americas, IBM reported first quarter revenue of $9.9 billion, up 8 per cent from the same period in 2007. Revenue from Europe, Middle East and Africa reached $8.8 billion, an increase of 16 per cent over the corresponding quarter last year. Asia Pacific revenue also grew significantly, up 14 per cent to $5.1 billion.

Key to overall growth at the company was sales to emerging markets, a segment for which IBM recently established a new group. These markets accounted for 17 per cent of revenue for the company, said Mark Loughridge, senior vice president and chief financial officer of IBM, speaking during a conference call to discuss the earnings.

"There are 3 billion people moving to the middle class in emerging markets. We expect this to continue, and we expect it to fuel our revenue and profit engine in 2008 and into the future," he said.

For now, much of the business in these regions is in infrastructure, primarily hardware, in segments such as telecommunications and banking, he said. While hardware has relatively low margins, it establishes a market for other IBM businesses in the future, such as software, maintenance and financing, he said. Those services produce ongoing revenue.

IBM has seen some effects of the economic downturn in the US, but not enough to worry about. "We saw customers scrutinizing deals more, and who wouldn't?" Loughridge said. "We've seen an elongation of the sales cycle, predominantly in established markets, but we don't think there will be an ongoing impact."

In fact, IBM is so confident it can maintain its rapid growth that it increased its expectations for the year. "We wouldn't typically change our full-year expectations after the first quarter," Loughridge said. But the first-quarter results were strong, and the company has enough indication that the growth will continue that it raised its earnings expectations for the year to at least $8.50 per share. It had previously expected between $8.20 and $8.30. That keeps the company on track to reach between $10 to $11 per share in profit in 2010, Loughridge said. IBM expects revenue for the year to grow 18 per cent over 2007.

There were a couple of sore spots, including OEM (original equipment manufacturer) revenue, which was down 16 per cent to $696 million.

IBM also saw revenue decline in its Systems and Technology segment. Revenue for the group was down 7 per cent compared to last year, but that decrease drops to 2 per cent when excluding the impact of the divestiture of its printing division in June of last year.

In the fourth quarter, IBM saw System z revenue fall by 15 per cent but at the time said that it expected increases after the introduction of the z10 enterprise class server early this year. That happened, with a revenue increase of 10 per cent from System z server products compared to the first quarter last year, IBM said. The server was only available for 34 days of the quarter, representing a strong rollout that promises even more in coming quarters, Loughridge said.

Revenue from the software segment was up 14 per cent, reaching $4.8 billion. Middleware products, including WebSphere, Information Management, Tivoli, Lotus and Rational produced $3.8 billion, up 16 per cent.

Global Business Services products $4.9 billion, up 17 per cent compared to the first quarter in 2007.

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