UPDATE 4-IBM contracts, revenue disappoint; shares fall

* Investors disappointed by services signings decline

* IBM Q2 rev $23.7 bln vs Wall St forecast $24.2 bln

* Ups full-year EPS view by a nickel to “at least $11.25”

* IBM shares fall 4 pct after-hours
(Adds comments from analyst, CFO)

By Ritsuko Ando

NEW YORK, July 19 (BestGrowthStock) – IBM (IBM.N: ) disappointed
investors by reporting a decline in new technology services
contracts in the second quarter, while a weaker euro hit
revenue more than expected, sending its shares down more than 4
percent.

While firm growth in the company’s higher-margin software
unit and sales in emerging markets bolstered profit, Monday’s
results were not as good as investors had wanted to see from
the world’s biggest technology services company.

Some analysts said International Business Machines Corp’s
results may weigh on technology shares on Tuesday, dampening
expectations that corporate IT spending was on the rebound
following sterling numbers from Intel Corp (INTC.O: ).

“Revenues were not as strong as people were expecting.
There were some currency hits …. But even with that, it might
have been a little bit weaker than people were expecting,” said
Mark Demos, portfolio manager at Fifth Third Asset Management,
an IBM shareholder.

“We’re coming out of the recession, and services signings
is one of the indicators that people would like to see at least
grow from year over year.”

IBM said its second-quarter revenue rose 2 percent to $23.7
billion. Analysts on average had expected $24.2 billion,
according to Thomson Reuters I/B/E/S. (IBM earnings graphic:
http://link.reuters.com/ryb48m)

Big Blue blamed currency rates for reducing revenue by
about $500 million in the quarter.

“If you really look at the difference to analysts
expectations, the difference is all currency,” said Chief
Financial Officer Mark Loughridge.

But analysts said were also concerned about the low
signings of services deals, a key indicator of future revenue.
Signed services contracts fell 12 percent to $12.3 billion,
while total outsourcing services signings decreased 19 percent
to $6.5 billion, it said.

Brian Marshall, analyst at Gleacher & Co, as well as Fifth
Third’s Demos had expected services contracts of around $14
billion.

“They were clearly affected from forex headwinds, but at
the end of the day, IBM continues to suffer from the law of
large numbers,” Marshall said. “The company is struggling to
find good growth opportunities.”

Loughridge explained that some contracts had slid into the
new quarter, and that revenue should grow in the third quarter
regardless of currency fluctuations.

OUTLOOK UP BY A NICKEL

Net profit slightly exceeded expectations and rose to $3.4
billion, or $2.61 a share, from $3.1 billion, or $2.32 a share,
a year earlier. Wall Street had forecast $2.58 a share.

Despite the solid showing in its bottom line, the company’s
shares fell 3 percent after-hours to $125.60 after closing at
$129.79 on the New York Stock Exchange.

The company’s higher outlook for full-year earnings — of
“at least $11.25” per share, up from “at least $11.20”
previously — helped little.

IBM shares have fallen about 2 percent over the past
quarter as investors focused on technology companies such as
Apple Inc (Read more about Apple stock future.) (AAPL.O: ) and VMware Inc (VMW.N: ) which are enjoying
double-digit percentage revenue growth.

Analysts said the decline in services signings was
especially disappointing given that its main rival Accenture
Ltd (ACN.N: ) recently posted solid bookings.

But few were recommending selling IBM shares, given the
company’s solid earnings growth. This was its 30th consecutive
quarter of year-on-year improvement in earnings per share, and
the company has said it plans to double its profit by 2015.

One of the strongest areas of revenue growth in the quarter
was emerging markets, which showed a 14 percent gain
year-on-year.

Edward Jones analyst Andy Miedler said he was keeping his
“buy” recommendation on the shares, saying they were
attractively valued at around 11 times earnings forecasts and
investors could depend on management to delivering earnings
growth.

“Investors definitely wanted to see more in terms of
bookings and revenue growth, but we expect them to continue to
deliver and move profitability higher,” he said.

IBM, which bought PwC Consulting from
PricewaterhouseCoopers in 2002 and sold its personal computer
business to Lenovo Group (0992.HK: ) in 2005, has spent the past
decade shifting away from commoditized hardware products,
focusing instead of more profitable software and services.

Its quarterly gross profit margin also inched up to 45.6
percent from 45.5 percent, helped by higher profitability in
its software and services business.

Shares of IBM slid to $124.51 after hours from a
regular-session close of $129.79. Analysts said disappointment
over IBM’s results contributed to the 5.8 percent fall in
shares of Texas Instruments Inc (TXN.N: ), which also reported
weaker-than-expected revenue on Monday.

Investment Analysis

(Editing by Edwin Chan and Richard Chang)

UPDATE 4-IBM contracts, revenue disappoint; shares fall