The Wall Street Journal-20080115-IBM Sales- Profit Give Tech a Healthier Look- Surprising Strenghth Fuels Market Rally- SAP Also Is Upbeat
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IBM Sales, Profit Give Tech a Healthier Look; Surprising Strenghth Fuels Market Rally; SAP Also Is Upbeat
International Business Machines Corp. surprised investors by preannouncing stronger-than-expected sales and earnings in the fourth quarter, leading to speculation that the U.S. economic slowdown may not be hurting technology companies as much as expected.
The battered stock market rallied and was further supported by an upbeat revenue announcement from German business-software giant SAP AG. Both companies sell to big business and governments world-wide and are seen as gauges of capital spending.
For investors, IBM's announcement "was a welcome surprise," said Chris Whitmore, who follows IBM for Deutsche Bank. But he cautioned: "We still have reservations about 2008. IBM's results don't change the forward outlook." He said he anticipates world-wide information- technology spending this year will rise only 3% compared with a 6% to 7% increase last year.
Market researchers say they have been scaling back their IT spending estimates recently. Stephen Minton, an analyst at IDC, Framingham, Mass., said the firm is re-evaluating after forecasting world-wide growth of 6.5% and U.S. growth of 5.5% two months ago. "It's possible our U.S. forecast will come down a little more," he said, because of expectations that troubled financial companies will cut their budgets. In a worst-case scenario, U.S. spending might rise only 4%, he said. Last year, IDC estimates, IT spending rose 7% both in the U.S. and world-wide.
IBM said that when it formally reports Thursday, earnings per share in the quarter will be $2.80. That would be 20 cents, or 7.7%, better than the $2.60 average of analysts surveyed by Thomson Financial. The result would be up 24% from the year-earlier quarter.
IBM Chief Executive Samuel J. Palmisano said in a statement the improvement was "led by strong operational performance in Asia, Europe and emerging countries." IBM said it will report quarterly revenue of $28.9 billion, up 10% from a year earlier and about $1 billion above analysts' estimates. About six percentage points of the gain came from currency translation, reflecting the dollar's fall against the euro and other currencies.
IBM stock had fallen steadily since the beginning of the year, but it rebounded after the announcement yesterday. The shares rose $5.26, or 5.4%, to $102.93 as of 4 p.m. in New York Stock Exchange composite trading.
Investors had been particularly concerned about IBM's results because the company gets about 30% of revenue from the financial sector, where subprime-lending woes have led to massive write-downs by several of IBM's biggest customers. IBM had cited a slowdown in the financial sector as worrisome in the previous quarter. The Armonk, N.Y., company declined to comment on the financial sector and other segments of its business.
Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co., said he believes a lot of financial companies use IBM mainframes and pay monthly fees for the software run on the big computers, so they aren't able to cut spending dramatically.
Mr. Sacconaghi said that while investors have been worried, risk to IBM is reduced because about 60% of the company's profits are recurring revenue from software license fees and long-term services contracts not affected quickly by customers' budget-cutting.
IBM didn't address its 2008 outlook except to say it is "well positioned." Deutsche Bank's Mr. Whitmore said he expects he will increase his earnings estimate to more than $8 a share for the year from $7.90.
IBM said full-year 2007 earnings per share rose 18% to $7.18 from $6.06 in 2006. The year's revenue grew 8% to $98.8 billion, including four percentage points from currency gains.
The company's cash at year end increased to more than $16 billion from $15.3 billion in 2006. Some of it presumably will be spent when IBM closes its $4.9 billion acquisition of software maker Cognos Inc.
