IBM earnings rise on services but margin narrows

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SAN FRANCISCO, Oct 16 (Reuters) IBM posted a 6 percent rise in quarterly profit on Oct 16 on strength in its services businesses, but profit margins narrowed and hardware sales fell on weaker demand from U.S. financial services clients.

Shares in the world's largest technology services company slipped about 1 percent as the report, in line with Wall Street targets, also showed IBM's revenue gain was largely due to a weaker dollar.

Chief Financial Officer Mark Loughridge told analysts on a conference call that Wall Street's fourth-quarter target of 15 percent earnings-per-share growth was ''reasonable'' and that the U.S. financial services issue did not suggest broader spending decline.

''I do think we had a financial-services slowdown,'' he said. ''I would not look at this and say this is a general economic decline,'' he added.

Third-quarter net income rose to $2.36 billion, or $1.68 per share, from $2.22 billion, or $1.45 per share, a year earlier. Revenue increased 6.6 percent to $24.1 billion from $22.6 billion, but rose 3 percent excluding currency-related gains.

The per-share profit and revenue results matched analysts' average expectations, according to Reuters Estimates. The gross profit margin in the third quarter narrowed to 41.3 percent from 42.0 percent a year earlier, due mainly to slips in software and global financing division margins.

The services business ''is certainly going to be the highlight of the quarter as an upside surprise,'' said Bob Djurdjevic, president of industry researcher Annex Research Inc. ''The downside surprise was a sharp drop in the mainframe revenues and shipments.'' The company's shares fell to $118.21 in extended trading following the earnings report after closing up 1.3 percent at $119.60 on the New York Stock Exchange.

International Business Machines Corp has improved year-over-year profitability over the last 12 consecutive quarters, as it spent more than $5 billion in 2006 on acquisitions, mainly software companies, to expand its most profitable business. IBM has been selling more software in its services segment, which accounts for more than one-half of revenue, as well as cutting jobs.

Revenue in IBM's global services division rose 14 percent and the company signed services contracts totaling $11.8 billion, up 12 percent from a year earlier.

Revenue from the software business rose 7 percent to $4.7 billion. The systems and technology business, which includes server computers, data storage gear and microchips, had revenue of $4.9 billion, down 10 percent from a year earlier.

Sales of mainframe computers, refrigerator-sized machines used by banks and insurers for heavy-duty computing, slumped 31 percent from a year earlier, when they rose 25 percent. Loughridge attributed the decline partly to a number of large deals that did not close before the quarter's end.

A slowdown in spending by U.S. financial services clients, among the biggest buyers of mainframe computers, cost IBM a percentage point of revenue growth in the third quarter, Loughridge said.

Third-quarter earnings per share ''were not outstanding,'' American Technology Research analyst Shaw Wu said. ''Some people were expecting better, including us at $1.70, but results were still in line.'' Analysts expect earnings before certain items to rise to $2.61 per share from $2.26 in the fourth quarter, according to Reuters Estimates.

IBM shares, up 21 percent so far this year, trade at 16.9 times expected 2007 earnings per share, compared with a multiple of 17.9 for Hewlett-Packard Co and 20.6 for Dell Inc DELL.O.


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