IBM won fewer technology services deals than expected in the third quarter, sending its shares 3.7 per cent lower, although it announced stronger profits and raised its full-year outlook
A decline in services and outsourcing contracts signed in the quarter, a key indicator of future revenue growth, prompted some investors to take profits after the shares hit a historic high of $143.04 earlier in the day.
Many analysts, however, said IBM was still a solid investment in the long term.
"It's like an eight-cylinder engine. Even if one is weak the others continue very strongly. And they're still going have a strong fourth quarter," said Collins Stewart analyst Louis Miscioscia.
IBM's quarterly net profit rose to $3.6 billion, or $2.82 a share, compared with $3.2 billion, or $2.40 a share, a year earlier. Analysts on average expected earnings per share of $2.75.
It also raised its full-year earnings outlook to at least $11.40 per share for the full year, up from its previous forecast of at least $11.25.
IBM's services contract signings fell 7 per cent to $11 billion in the quarter and outsourcing signings fell 15 per cent to less than $6 billion. But IBM also said it won a major services deal with ABN AMRO on October 8th, shortly after the quarter closed.
The strongest performance in the quarter came from IBM's traditional hardware business. Its "System z" mainframe computer sales rose 15 per cent, helped by a new line of products, leading a 3 per cent rise in overall revenue.
The company has over the past decade shifted its focus to high-margin software and services from commoditised equipment. It bought PwC Consulting from PricewaterhouseCoopers in 2002, and sold its personal computer business to Lenovo Group in 2005.
IBM's third-quarter net margin rose 1.1 points to 14.8 per cent and its increasing profitability has been a key attraction for investors.
But some analysts said hardware should not be taken too lightly, even if it accounts for less than 20 per cent of IBM's revenue, since many clients choose IBM software and services because they also use IBM's massive data processing equipment.
Reuters