Big Blue stock rallied more than 4 percent in heavy trading Thursday after its latest earnings report and forecast encouraged investors.
Shares ended the day up 3.8 percent at $195.34. More than 10.3 million shares traded hands compared to the daily average of 4 million shares.
Overall, IBM (NYSE: IBM) biggest gain in six months after saying its stream of rising profits will go on, even in the shaky economy. IBM was the top performer among the 30 companies that make up the Dow Jones Industrial average.
After the stock market closed Wednesday, IBM announced its second-quarter earnings climbed by 6 percent despite a drop in revenue that was deeper than analysts anticipated. The shortfall was tied to the economic turmoil in Europe that has weakened currencies abroad, translating into less revenue when IBM’s overseas sales are converted into U.S. dollars
Similar revenue trends are expected during the final half of the year, but IBM believes it will be still be able to increase its earnings by managing its expenses and selling more software products, which have better profit margins than the mainframe computers that were once the foundation of the 101-year-old company.
Management signaled its confidence by raising its full-year guidance Wednesday. The full-year forecast implies IBM’s earnings will rise by about 10 percent during third and fourth quarters. If that happens, IBM will have posted higher year-over-year earnings for 40 consecutive quarters.
Shares rose as high as $196.85 after opening at $193.23. Shares closed at $188.25 Wednesday.
That gains the stock’s biggest gain since January following the release of the company’s fourth-quarter earnings and financial projections for this year. The shares have ranged from $157.13 to $210.69 in the past year.
Excluding some items, profit will increase to at least $15.10 a share this year, up from a previous forecast of $15. Analysts had predicted $15.06 on average, according to data compiled by Bloomberg. Earnings were $3.51 in the quarter, topping the $3.43 average estimate, even as sales declined.
IBM aims to get half of its earnings from software by 2015 — a move away from less-profitable hardware and services. Chief Executive Officer Ginni Rometty sees an opportunity for growth by selling software in developing economies and creating programs that work with cloud computing and business analytics.
“This quarter certainly suggests that the software play was a good idea,” said Andrew Bartels, an analyst with Cambridge, Massachusetts-based Forrester Research Inc. “The margins are much better than in other categories, and there are signs that demand may start to get stronger in the second half of the year.”
Adding Salespeople
The company plans to hire as many as 300 salespeople each month for the rest of the year to help promote its software products, Chief Financial Officer Mark Loughridge said Wednesday on a conference call. The shift to software, along with other moves such as stock buybacks and acquisitions, has helped IBM keep earnings stable through the economic headwinds in Europe and a slowdown in China, said Amit Daryanani, an analyst with RBC Capital Markets in New York.
“They’re continuing to execute on things that have worked for them in the past,” he said. “They have a lot of levers, like accelerating cost savings or doing more aggressive buybacks, to reach their numbers.”
IBM sales fell 3 percent to $25.8 billion last quarter, dragged down by sluggish demand for hardware and currency fluctuations. Adjusting for currency changes, the revenue climbed 1 percent. Analysts had predicted sales of $26.3 billion, the average of estimates compiled by Bloomberg.
Profit Goal
Rometty has a five-year plan that targets annual operating earnings of at least $20 a share by 2015, up from $13.44 last year. Analytics software, which helps businesses predict trends, is seen generating $16 billion in sales by 2015, while cloud computing will account for $7 billion. Companies are increasingly storing their data and programs in the cloud, which means they access the software online via remote data centers.
IBM has used buybacks to reduce its share count by a third since 2000 and boosted its repurchase plan by $7 billion in April. That has helped the company lift its earnings per share and stock price and won praise from investors such as Warren Buffett.
Second-quarter net income increased 5.9 percent to $3.88 billion, or $3.34 a share, from $3.66 billion, or $3, a year earlier. IBM’s sales in Europe, the Middle East and Africa were worth less when converted to dollars, as the euro declined about 12 percent from a year earlier.
The credit crisis in the region also may have hurt growth.
“IBM hedges for that quite a bit, but currency got ugly,” said Ed Maguire, an analyst with Credit Agricole Securities in New York.
Formerly IBM’s sales and marketing head, Rometty, 54, succeeded Sam Palmisano in January. She became the first female CEO in the company’s 100-year history. Palmisano, who had been CEO since 2002, remains chairman.
IBM employs some 10,000 people across North Carolina.
[IBM ARCHIVE: Check out a decade of stories as reported in WRAL Tech Wire.]
(The AP and Bloomberg contributed to this report.)
