IBM Q3 revenue rises, but signs of downturn loom

Revenue up 5 percent for Big Blue, but hardware and service contracts sales have slowed.

IBM on Thursday reported third-quarter revenue of US$25.3 billion, up 5 percent from the year before, but also said hardware sales and new service contract signings had slowed.

Net income grew by 20 percent to $2.8 billion, with earnings per share increasing 22 percent to US$2.05. Analysts polled by Thomson Reuters had on average predicted earnings of $2.03 per share, with about $25.9 billion in revenue.

IBM's sales were hurt by a slowdown in its Systems and Technology business, which had US$4.4 billion for the quarter, down 10 percent. System z mainframe sales were a bright spot within the division, however, rising 25 percent.

While Global Technology Services revenue rose 8 percent to US$9.9 billion, and Global Business Services sales increased 7 percent to $4.9 billion, new service contract signings -- a predictor of future revenue -- fell 4 percent to $12.7 billion. However, short-term signings grew 13 percent to $6.1 billion.

Pre-tax profit for the Global Services segments jumped 23 percent, said Mark Loughridge, IBM's chief financial officer, during a conference call. "This was the highest level of services pre-tax margin in six years. It's especially important, given that we did it in the seasonally challenging third quarter," he said.

IBM does not want to risk that strong margin performance just to sign more deals, Loughridge said.

"There are a lot of enterprises dealing with a tough environment, looking for ways to reduce costs, conserve capital, and in some cases just to survive, so there's a lot of good services opportunity out there," he said. "But frankly, there are also many deals that have very unattractive economics, and while these may be interesting to some of our competitors, they're not to us... We've built a strong and profitable business and we're not going to put that at risk just to show a higher level of signings."

IBM is facing stiff competition in the services arena from Hewlett-Packard, which recently bought the giant systems integrator EDS.

Beyond services, IBM's software revenue increased 12 percent to US$5.2 billion in Q3. Strong performers there included Information Management and Rational products, with 26 percent and 23 percent growth, respectively. Loughridge credited IBM's acquisitions of Cognos and Telelogic for that revenue growth.

On a geographic basis, Americas' third-quarter revenue was US$10.5 billion, an increase of 3 percent over 2007; Europe/Middle East/Africa sales were $8.9 billion, for 10 percent growth; and revenue in Asia-Pacific increased by 6 percent to $5.2 billion.

Overall, IBM is well-positioned to weather the financial crisis due to factors like its strong global presence and healthy cash reserves, Loughridge said.

He also reaffirmed IBM's previously stated year-long earnings goal of US$8.75 per share.

IBM's shares were up US$1.95 to $93.47 in after-hours trading.

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