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IBM: Strong Earnings, Bullish Outlook

IBM earnings

IBM on Thursday announced it is raising full year guidance after a third quarter that exceeded analyst projections although revenue fell short of expectations. The company now expects 2009 earnings to be $9.85 a share, up from its previous projection of $9.70.

The IT giant reported a third quarter profit of $3.2 billion, or $2.40 a share, on revenue of $23.6 billion. Analysts surveyed by Thomson Reuters had estimated IBM would earn $2.38 a share on $23.86 billion in sales.

That net income represents a 14 percent increase over the same quarter of 2008, but like most of its technology counterparts, IBM's (NYSE: IBM) revenue is still below this point in 2008. The $23.6 billion in sales for Q3 2009 were down 6.9 percent from last year, when the company reported $25.3 billion in revenue.

"We are using this strong profitability to invest in capabilities that differentiate IBM and accelerate opportunities into new markets. These include business analysis, a smarter planet and green technology," said Mark Loughridge, senior vice president and chief financial officer of the company, on a conference call with analysts.

Software outlook

IBM's software revenue were $5.1 billion, a decrease of 3 percent (flat, adjusting for currency) compared with the third quarter of 2008. However, Loughridge was very bullish on software in particular helping IBM in coming quarters.

"Software had a really terrific quarter," he said, citing revenues from WebSphere, Information Management, Tivoli, Lotus and Rational products rose two percent (five percent adjusted for currency) to $2.9 billion versus the third quarter of 2008.

With more than 80 percent of its business coming from overseas, IBM is particularly sensitive to fluctuations in currency. A weak dollar means overseas currencies do not translate into the same dollars as they would in the U.S.

Not that IBM is going broke. It's sitting on $11.5 billion in cash alone, while simultaneously reducing its total debt by $4 billion since June. Of its total debt of $25.5 billion, $23 billion of that is tied up in its financing business. Only $2.5 billion is non-financing related, which gives the company a lot of liquidity and frees it to continue on its strategies, including its aggressive acquisitions strategy, Loughridge noted.

Hardware, not exactly IBM's biggest business any more, still did well. The company gained five points in System p and two points of share in System x. "That's a lot of share, and we're taking it from both Sun and HP," said Loughridge. In total, he estimates IBM has racked up $400 million in sales from units that were replacements of competitive products from HP and Sun.

IBM has a services backlog of $134 billion, $5 billion more than last quarter. This includes many multiyear engagements that are still playing out. While services were down in Q3, the company signed a trio of very large deals that would have had it up for the quarter if those deals had been signed just a few days earlier.

"I think IBM did have another great quarter. Like the second quarter, earnings per share were up 18 percent but we had better revenue performance and share gains. Software has led the way with profit up 18 percent year to date," Loughridge said.

When asked his view on the economic landscape during the analyst Q&A, Loughridge was optimistic. "What we see more broadly is some stabilization in the econ environment. One of the key indicators in that stability is credit markets have improved on a year-to-year basis," he said.

(Update adds comments from the conference call.)