IBM Says It Will Weather Global Financial Chaos

IBM on Thursday reported third-quarter net income rose to $2.8 billion, or $2.05 per share, from the $2.4 billion, or $1.68 per share, it reported a year earlier. Revenue for the quarter rose five percent to $25.3 billion.

The results were in line with the preliminary figures released last week, done mostly to help calm the hysteria on Wall Street when the market was in a free fall.

IBM (NYSE: IBM) shares rose $2.23 (2.44 percent) in after hours trading to close at $93.75.

“We had great margin performance in Q3 and met our profit objectives,” Mark Loughridge, IBM’s senior vice president and chief financial officer, told a conference call of investors. “We think we can continue to move into Q4 at about the same revenue growth and double digit profitability growth for (the global services units).”

He said IBM will continue to cut costs and improve its efficiency, and expects the company to remain on target. “Expect an EPS (earnings per share) of at least $8.75 for all of 2008,” he said.

However, he would give no guidance for the upcoming quarter, stating “We have the right operational plan to drive double digit revenue growth in emerging markets and get ongoing improvements.”

Global technology services revenue was up eight percent, or five percent in constant currency, to $9.9 billion. Long-term signings were down 15 percent while short-term signings were up eight percent, according to Loughridge.

Global business services revenue was up three percent, adjusting for currency, to $4.9 billion. Growth was impacted by year-to-year declines in Japan and Australia. Short-term signings were up 10 percent, with signings up in Europe and Asia but down in the Americas.

Software revenue was $5.2 billion, up 12 percent year over year, or eight percent in constant currency. WebSphere revenue was up four percent; IBM’s virtualization technology “sold well in the third quarter,” information management grew 26 percent YoY, with Cognos, which IBM acquired in February for $5 billion, being “a key driver,” Loughridge said.

Emerging markets represent 19 percent of IBM’s market, and he particularly singled out China, where he said results were down four percent because the Olympics “caused a delay in IT spending and we didn’t understand the breadth and duration of the delay.”

However, IBM continues to invest in China, to capture growth, Loughridge said, and on Tuesday it announced that it had opened a new research facility in Shanghai.

Loughridge said IBM’s software business was the best performing; short-term signings in services were good while long-term signings slowed; and IBM’s systems and technology business was impacted “as customers looked to optimize through virtualization and consolidation.”

Next: Will Big Blue catch the Wall Street flu?

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The global financial crisis weighed heavily on Loughridge as he addressed a group of analysts in an earnings call today.

Addressing fears that the collapse of the financial industry will impact IT sales, Loughridge said that IBM’s leases are non-cancellable and the company is protected if its clients undergo mergers or acquisitions. If they go bankrupt, “our leases are sustained by bankruptcy courts, and, if we have to repossess the equipment, that can be resold,” he added.

“We have a business model designed to deliver profit and cash, with a disciplined approach to aligning investment to growth,” Loughridge said. In the more established markets, IBM focuses on delivering “high value solutions and productivity,” and, in emerging markets, it focuses on building out public and private infrastructure.

IBM “finished the quarter with almost $10 billion in cash, our pricing for commercial paper remains well under LIBOR and we have not experienced any problems accessing commercial paper,” he said.

LIBOR, the London Interbank Offered Rate, is the rate at which banks offer to lend unsecured funds to other banks in the wholesale money markets in London. Lenders worldwide base their interest rates on it.

Over the past month, LIBOR has nearly doubled, from 2.75 percent to 4.47 percent, and this has been seen as yet another sign of the global financial crisis, although the rate is still lower than it was last year.

“This is a tough market, but we have a very strong liquidity position” with $20 billion in available liquidity, of which $9.8 billion is in cash and $10 billion is a “global credit facility backstop,” Loughridge said. On top of this, the computer giant raised an additional $4 billion in cash from a bond sale last week, he pointed out.

With that strong financial grounding, IBM does not need to rely on commercial paper, and “could eliminate our reliance on short-term commercial paper markets for funding our business if we chose, but our experience has been positive,” Loughridge added.

IBM’s global financing arm had revenues of $600 million in the third quarter, or 2.5 percent of the vendor’s revenues, and “about 60 percent” of its portfolio consists of investment grade clients “with no exposure to consumers or mortgage lending,” Loughbridge said. IBM “closely monitors” its clients’ credit ratings.

Citing a New York Times article earlier this month listing 21 companies involved in buyout and takeover activities, Loughbridge said these companies constitute only “one percent of IBM’s total revenue and the same proportion of our outstanding receivables.”

While institutions around the world, including insurance giant AIG, have collapsed because they held large amounts of mortgages, IBM, whose global financing business “generates strong return on equity and facilitates customer acquisition of IBM hardware, software and services,” will remain untouched.

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