IBM Corp. raised its income guidance for the year on Monday as earnings in the latest quarter increased 8 per cent because of growth in all three of its major product categories.
The results show the strength of the 100-year-old company's efforts to link its mainframes and other computing hardware with its newer businesses, software and services. Those two categories bring in the bulk of IBM's income.
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Signings of new contracts for services increased - a welcome sign for Wall Street after a decline last quarter.
But the company faces questions about whether its profit increases are sustainable. Some analysts worry about increased competition, specifically in outsourcing, the biggest part of IBM's services business.
Investors gave the numbers a tepid endorsement. The stock rose 2 percent.
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Net income was $3.66 billion, or $3 per share, in the second quarter compared with $3.39 billion, or $2.61 per share, a year ago. Excluding items, IBM earned $3.09 per share, ahead of the $3.02 per share analysts expected.
Revenue increased 12 percent to $26.7 billion, ahead of the $25.4 billion analyst estimate.
New contract signings in services increased 16 percent over last year to $14.3 billion. They had declined 14 percent in the first quarter, raising fears about the robustness of IBM's pipeline of new deals.
IBM has stopped including this figure in its earnings releases; it can now only be found deep in the charts accompanying the results. Instead, IBM insists that its backlog of services deals that are already in the pipeline is a better predictor of future revenue. The backlog is now $144 billion, $15 billion higher than last year.
Guidance for 2011 calls for at least $13.25 per share, excluding items, up from the previous estimate of $13.15 per share.
But the company's history makes it subject to high expectations. IBM, which is based in Armonk, N.Y., has not only consistently raised its guidance, but it has also taken the rare step of setting a specific long-term profit goal - $20 per share in operating earnings by 2015. So investors now expect steady guidance increases.
Brian Marshall, an analyst with Gleacher & Co., said he was disappointed with the latest numbers. IBM's income should have been higher considering that revenue was more than $1 billion higher than estimates, he said.
"They are spending faster than I thought - that is my main concern," Marshall said, adding that IBM's ability to hit its long-term profit target is "not a slam dunk in my view."
IBM's stock rose $4.07, or 2.3 percent, to $179.35 in extended trading after the release of results Monday. In the regular session earlier, the stock fell 26 cents to $175.28. The stock is up more than 40 percent since September, indicating investors' overall belief about IBM's profit predictions.