IBM shakes off economic uncertainty

IBM beat analyst expectations for the first quarter and the company pointed to its global reach in helping to drive growth despite a challenging market.

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IBM beat analyst expectations for the first quarter and the company pointed to its global reach in helping to drive growth despite a challenging market.

First quarter revenue was US$24.5 billion (£12.25 billion), up 11 percent compared to the same quarter last year. Analysts expected quarterly revenue of $23.7 billion, based on a consensus collected by Thomson Financial.

Diluted earnings per share were $1.65, up 36 percent from $1.21 in the first quarter last year. That compares to Thomson's consensus expectation of $1.45.

In the Americas, IBM reported first quarter revenue of $9.9 billion, up 8 percent from the same period in 2007. Revenue from Europe, Middle East and Africa reached $8.8 billion, an increase of 16 percent over the corresponding quarter last year. Asia Pacific revenue also grew significantly, up 14 percent to $5.1 billion.

Key to overall growth at the company was sales to emerging markets, a segment for which IBM recently established a new group. These markets accounted for 17 percent of revenue for the company, said Mark Loughridge, senior vice president and chief financial officer of IBM, speaking during a conference call to discuss the earnings.

"There are 3 billion people moving to the middle class in emerging markets. We expect this to continue, and we expect it to fuel our revenue and profit engine in 2008 and into the future," he said.

For now, much of the business in these regions is in infrastructure, primarily hardware, in segments such as telecommunications and banking, he said. While hardware has relatively low margins, it establishes a market for other IBM businesses in the future, such as software, maintenance and financing, he said. Those services produce ongoing revenue.

IBM has seen some effects of the economic downturn in the U.S., but not enough to worry about. "We saw customers scrutinizing deals more, and who wouldn't?" Loughridge said. "We've seen an elongation of the sales cycle, predominantly in established markets, but we don't think there will be an ongoing impact."

In fact, IBM is so confident it can maintain its rapid growth that it increased its expectations for the year. "We wouldn't typically change our full-year expectations after the first quarter," Loughridge said.

But the first-quarter results were strong, and the company has enough indication that the growth will continue that it raised its earnings expectations for the year to at least $8.50 per share. It had previously expected between $8.20 and $8.30. That keeps the company on track to reach between $10 to $11 per share in profit in 2010, Loughridge said. IBM expects revenue for the year to grow 18 percent over 2007.

There were a couple of sore spots, including OEM (original equipment manufacturer) revenue, which was down 16 percent to $696 million.

IBM also saw revenue decline in its Systems and Technology segment. Revenue for the group was down 7 percent compared to last year, but that decrease drops to 2 percent when excluding the impact of the divestiture of its printing division in June of last year.

In the fourth quarter, IBM saw System z revenue fall by 15 percent but at the time said that it expected increases after the introduction of the z10 enterprise class server early this year. That happened, with a revenue increase of 10 percent from System z server products compared to the first quarter last year, IBM said. The server was only available for 34 days of the quarter, representing a strong rollout that promises even more in coming quarters, Loughridge said.

Revenue from the software segment was up 14 percent, reaching $4.8 billion. Middleware products, including WebSphere, Information Management, Tivoli, Lotus and Rational produced $3.8 billion, up 16 percent.

Global Business Services products $4.9 billion, up 17 percent compared to the first quarter in 2007.

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