IBM Drops on Decline in Service-Contract Signings

Tuesday, 19 Oct 2010 09:52 AM

 

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International Business Machines Corp., the world’s largest computer-services provider, declined as much as 4.3 percent in New York trading after a drop in new contracts overshadowed an improved financial forecast.

Services signings fell 7 percent to $11 billion in the third quarter, Armonk, New York-based IBM said yesterday in a statement, the third straight quarterly drop in new contracts. While companies increased spending on IBM’s software and hardware, such as storage computers, they’re holding back on large outsourcing projects in the aftermath of the recession.

IBM boosted its full-year profit forecast to at least $11.40 a share, the third time it raised 2010 earnings guidance this year. The company also reported earnings and sales for the period that exceeded analysts’ estimates.

Investors focus on the service business because it accounts for almost 60 percent of IBM’s annual sales and more than 40 percent of its profit.

“Investors are likely to key in on IT-services signings being a bit below expectations,” said Andy Miedler, an analyst at Edward Jones & Co. in St. Louis, who recommends buying the shares. “It’s a key measure of deal activity.”

The company signed a $1.8 billion outsourcing deal with ABN Amro Group NV on Oct. 8. If that had occurred in the third quarter, services signings would have been $12.7 billion, IBM said.

IBM fell $5.40, or 3.8 percent, to $137.43 at 9:40 a.m. in New York Stock Exchange composite trading, after earlier falling as low as $136.70. This month, the shares topped their record closing high of $137.88, set in 1999, and had extended their gains since.

‘Difficult to Predict’

“It’s very difficult to predict precisely when these deals will close, and eight days is not going to make any difference in the yield to this contract,” Chief Financial Officer Mark Loughridge said yesterday on a conference call. The company has a “strong deal list” for outsourcing signings this quarter, he said.

Net income for the quarter increased 12 percent to $3.59 billion, or $2.82 a share, from $3.21 billion, or $2.40, a year earlier. Analysts predicted $2.75, the average of estimates compiled by Bloomberg.

Sales climbed 3 percent to $24.3 billion, topping analysts’ average projection of $24.1 billion. It’s the third consecutive period during which all business units -- hardware, software and both services segments -- posted sales gains.

The new full-year profit forecast also exceeded the $11.30 average of analysts surveyed by Bloomberg.

Operating Earnings

Chief Executive Officer Sam Palmisano is aiming to almost double operating earnings to $20 a share in the next five years. Software will make up about half of profit by then, the company said in May.

IBM has invested in analytics software and services that help predict trends, as well as cloud computing, which helps customers save money by letting them store and access data via the Internet, rather than from their own servers. Palmisano also has been investing in his Smarter Planet initiative, based on the concept that infrastructure, such as buildings or roads, can be equipped with digital sensors, which in turn will make them more efficient.

The three technologies, along with sales from emerging markets, will add $20 billion in revenue by 2015, the company said in May.

Palmisano said he plans to spend about $20 billion on acquisitions in the same period. He announced seven deals last quarter, including the $1.7 billion purchase of Netezza Corp.

© Copyright 2014 Bloomberg News. All rights reserved.

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