IBM Boosts 2008 Profit Outlook, Helped By Overseas Growth

IBM on Thursday confirmed that it did its part to lift the struggling tech sector with fourth-quarter results that beat forecasts.

The good news was tempered by weak U.S. sales growth, but IBM IBM raised its profit guidance for 2008 and also said sales to financial services customers -- a particular concern of investors and analysts -- were holding up well.

"This turned out to be a great quarter," Mark Loughridge, IBM chief financial officer, said Thursday on a conference call with analysts.

IBM shares were up more than 5% in after-hours trading, after its latest report.

IBM on Thursday officially released results it had announced on Monday, when it surprised Wall Street with a positive report. Big Blue reported quarterly earnings of $2.80 a share on sales of $28.9 billion. That marked a 24% gain in profit and a 10% rise in sales vs. the year-ago quarter. Before Monday, analysts had expected EPS of $2.60 on sales of $27.8 billion.

On Monday, IBM said results overseas boosted its results, and Thursday's full report showed by how much. While sales in Europe and Asia rose 16% and 15%, respectively, the Americas saw just 5% growth. On a constant currency basis, which eliminates the effects of fluctuating exchange rates, sales in Europe, Asia and the Americas rose 6%, 9% and 2%.

For the year, IBM said per-share profit rose 19% to $7.18, while sales rose 8% to $98.9 billion. Those are its second-highest percentage gains for any year going back to 1999.

For 2008, IBM expects per-share profit of $8.20 to $8.30, up 15% to 16%, Loughridge said. Thomson Financial said analysts were expecting $7.94, while Goldman Sachs and JPMorgan said Wall Street was expecting $7.91.

Revenue in the financial services sector rose 11% in the quarter, consistent with IBM's total performance, Loughridge said. The subprime mortgage meltdown has many investors worried that U.S. spending, particularly by financial firms, will quickly slow down.

But Loughridge also said that 75% of IBM's financial services revenue came from outside the U.S.

IBM finished 2007 with a record cash balance of $16 billion. Chief Executive Sam Palmisano has said Big Blue will invest $1.6 billion over the next three years to bolster its presence in developing countries such as India, China and Brazil.

In a statement on Monday, Palmisano said the company is on track to reach its goal of 16% annual earnings growth through 2010.

IBM services revenue, which makes up the majority of total sales, rose 17%, or 10% adjusted for currency, to $14.9 billion last quarter.

Software sales, IBM's most profitable business, rose 12%, or 6% adjusting for currency, to $6.3 billion. Hardware sales, however, fell 4%, or 8% adjusting for currency, to $6.8 billion.

IBM's hardware business and North American revenue growth are potential indicators of overall tech spending trends, says Toni Sacconaghi of Sanford Bernstein & Co. He rates the stock outperform.

David Bailey, a Goldman Sachs analyst, wrote in a note before Thursday's release that "we view IBM as defensive in the current environment and we are keeping our buy rating on IBM on the back of solid earnings growth and low valuation."