IBM forecasts strong earnings

BOSTON - Stellar performance overseas prompted IBM Corp. to upgrade its outlook for 2008 despite economic uncertainty at home, raising the question of whether an increasingly diverse IBM still should be considered a bellwether for other U.S. tech companies.

Investors responded to Thursday's report by sending IBM shares up $2.79, or nearly 3 percent, to $103.89 in midday trading Friday.

While many companies are warning of a recession in the U.S. and issuing cautious guidance, IBM advised analysts to increase their expectations. Chief Financial Officer Mark Loughridge said earnings should be $8.20 to $8.30 per share this year, well ahead of the $7.94 analysts had been forecasting.

The optimism was striking because of the cloudy economic backdrop and IBM's reliance on the troubled financial-services industry for more than one-fourth of its revenue. Plus, IBM is typically conservative on such predictions.

"They certainly defied conventional wisdom," said Shaw Wu, an analyst with American Technology Research.

Loughridge acknowledged that "we have an uncertain economic environment that we're working through along with the rest of the business world." But he expects IBM to be carried by its aggressive investments to expand its sales efforts in developing markets. He said the chance to help establish computing networks in such places as Eastern Europe, Vietnam and China amounted to "the gold rush of the 21st century."

Analysts were particularly struck by Loughridge's revelation that more than one-fifth of IBM's revenue now comes from countries where IBM's sales are growing better than 10 percent. By comparison, IBM's U.S. revenue rose just 2 percent.

And many analysts expect worldwide spending on information technology overall to grow at the low end of its usual range this year.

In other words, IBM's optimism reflects the particulars of its size and ever-more international focus — and might not say much about the prospects for most other tech companies. Even Intel Corp., which gets 75 percent of its revenue outside the U.S. — more than IBM's 65 percent — issued financial guidance this week that was cautious because of U.S. economic pressures.

IBM is "kind of a unique case," Wu said. "There's not a lot of guys having this capability. IBM might not be the best barometer anymore."

In the last three months of 2007, IBM earned $3.95 billion, or $2.80 per share, on revenue of $28.9 billion. The net profit rose 12 percent from a year earlier, when IBM made $3.54 billion, $2.31 per share, on revenue of $26.3 billion.

IBM's 10 percent revenue gain would have been 4 percent if not for weakness in the dollar. Payments in other currencies now translate into more dollars.

IBM had released the per-share and revenue figures Monday because the numbers were well beyond Wall Street's forecasts. Analysts surveyed by Thomson Financial had been expecting $2.60 per share on revenue of $27.8 billion.

Thursday's report revealed IBM's net numbers and segment details, showing that the Armonk, N.Y.-based company continues to increase its reliance on software, its most profitable product line.

The software division's revenue rose 12 percent to $6.3 billion. The gain would have been 6 percent if not for weakness in the dollar.

Services revenue leaped 17 percent to $14.9 billion. The increase would have been 10 percent at constant dollar values.

In another closely watched measure, IBM services unit signed $15.4 billion in new contracts in the fourth quarter, down 13 percent. Those signings reflect revenue that will flow to the company in the coming years.

The hardware division's revenue dropped 4 percent to $6.8 billion. The revenue figure would have been flat from a year earlier if not for IBM's 2007 sale of its printing division.

A weak spot was IBM's crucial mainframe business, which saw a 15 percent sales decline. Loughridge said customers appeared to be waiting for a new mainframe model being released this winter.

For all of 2007, IBM earned $10.4 billion, $7.18 per share, on revenue of $98.8 billion. Those figures all rose from 2006, when IBM made $9.5 billion, $6.11 per share, on revenue of $91.4 billion. The revenue gain of 8 percent would have been 4 percent at constant currency values.