International Business Machines Corp. (NYSE:IBM), the largest computer-services company, raised its annual forecast after second-quarter earnings topped analysts’ estimates, lifted by cost cuts and share buybacks.
Excluding a $1 billion restructuring expense, profit was $3.91 a share last quarter, the Armonk, New York-based company said yesterday in a statement. That beat the $3.78 that analysts projected on average, according to data compiled by Bloomberg. IBM now expects to earn at least $16.90 a share in 2013, up from the $16.70 it forecast earlier this year.
IBM has managed to increase profit by shifting away from low-margin businesses, cutting jobs and repurchasing stock -- even as revenue declines. The company is betting that faster- growing areas such as cloud computing and data analysis can offset a broader slowdown in information-technology spending.
“We have to take them at their word that they’re going to see some productivity improvements due to the workforce changes, and some strength in software and services,” said Josh Olson, an analyst with Edward Jones & Co. in Des Peres, Missouri. “They’re getting a benefit from software growing at a faster pace than the other businesses, and that’s contributing to the profit beat.”
The shares climbed 2% to $198.34 at 10:04 a.m. in New York. The stock was up 1.6% this year through yesterday, trailing an 18% gain for the Standard & Poor’s 500 Index.
By beating earnings estimates, IBM rebounds from a rare stumble in the previous quarter, when its profit missed projections for the first time in eight years. Even so, revenue continued to decline, falling 3.3% to $24.9 billion from a year earlier. Analysts had expected $25.3 billion. Sales declined in every IBM business division other than software.
In addition to a slump in demand, currency changes took a toll on IBM’s results last quarter. In Japan, where the company made about 10% of its sales last year, the yen fell 5% versus the dollar in the second quarter. The company was “significantly impacted” by the yen’s weakness, Chief Financial Officer Mark Loughridge said on a conference call.
“Because our business in Japan is more heavily skewed to local services, we have less ability to hedge cross-border cash flows as compared to most other countries,” Loughridge said.
Other technology companies are suffering as well. Intel Corp., the world’s largest chipmaker, reported its fourth straight revenue decline yesterday as customers shunned personal computers, choosing tablets and smartphones instead.
Accenture Plc, the world’s largest technology-consulting company after IBM, gave a sales forecast last month that missed analysts’ estimates. Accenture blamed customers deferring decisions on long-term contracts. Oracle Corp., meanwhile, has missed sales estimates for two straight quarters, hurt by slumping hardware revenue and a shift by customers to applications delivered online.
IBM prioritizes earnings over revenue growth in its five- year road map, which is targeting profit of $20 a share by 2015, up from the $15.25 earned last year. The plan calls for a combination of buybacks, acquisitions and investments in faster- growing markets to reach that goal.
Following the previous quarter’s earnings shortfall, Chief Executive Officer Ginni Rometty shook up the management of IBM’s struggling hardware division. She replaced Rod Adkins with Tom Rosamilia, who had been overseeing corporate strategy. That division saw a 12% decrease in sales last quarter, an improvement from the 17% drop in the first quarter.
IBM also embarked on a restructuring program last quarter, cutting jobs globally. More than 3,300 workers were dismissed in the U.S. and Canada alone, according to Alliance@IBM, an employee group.
The company said in April that divestitures would help offset the $1 billion cost of the restructuring. At the time, IBM was in talks to sell parts of its server division to Lenovo Group Ltd., according to people familiar with the discussions. The negotiations broke down in early May due to disagreements over price, one person said.
Yesterday the company said it was reducing its expectations for second-half gains from a divestiture.
“The substantial second-half gain that we were counting on in our view of EPS will not likely close at the end of this year, but we’re still in active discussions,” Loughridge said. “We have a very disciplined M&A process. We’re not going to underprice or rush a divestiture simply to close within 2013.”
Second-quarter net income fell 17% to $3.23 billion, or $2.91 a share, from $3.88 billion, or $3.34, a year earlier. The company paid $1 billion in dividends and made $3.6 billion in stock buybacks in the period, boosting earnings per share.
The company is seeing growth in high-margin businesses and bookings look promising, Loughridge said.
“We’re exiting the quarter stronger than we entered,” he said.