After losing Sun to Oracle, IBM earnings up

For the first quarter, IBM earnings were up and narrowly beat analyst expectations

On the same day it appeared to have missed its chance to buy Sun Microsystems, IBM reported that revenue for the first quarter dropped 11 percent from a year earlier and had fallen short of analyst expectations.

Total revenue for the quarter was US$21.7 billion, just under the $22.5 billion that analysts polled by Thomson Reuters had expected.

But diluted earnings per share were $1.70, a 4 percent increase over the first quarter of 2008. That beat analyst expectations of $1.66 per share. Net income, however, fell 1 percent to $2.30 billion from $2.32 billion.

On Monday, Oracle announced that it had agreed to buy Sun. The deal follows rumors, never confirmed, that IBM had made an offer for the company that Sun deemed too low. The successful deal now puts Oracle in more direct competition with IBM, since Oracle will have a similar combined hardware and software business model.

But IBM said it wasn't worried that competition will be tougher from a combined Oracle and Sun. "As I look at this and ask myself what's really changed, I think nothing," said Mark Loughridge, IBM's chief financial officer, during a conference call to discuss the earnings.

IBM knows Oracle and Sun well, and now that they have "the same address and mailbox, it's the same teams we've been competing against and winning against in the field," he said.

While he did not confirm that IBM had made an offer for Sun, Loughridge said IBM has enough cash for any significant acquisition opportunities that might arise. The company will look to make investments that contribute to its products for cloud computing, business optimization and its Smarter Planet initiative, he said. IBM has bought more than 100 companies since 2000, at a cost of $20 billion, he said.

IBM is still clearly struggling in the ailing economy, though Loughridge said recent efficiency improvements should start to pay off soon. Revenues in its Global Technology Services segment decreased 10 percent compared to the first quarter last year to $8.8 billion, and its Global Business Services segment revenue decreased 10 percent to $4.4 billion.

Revenues from its software segment also declined, dropping 6 percent to $4.5 billion. Revenue from middleware products, which include WebSphere, Tivoli and Lotus, also dropped 5 percent compared to the same period in 2008, to $3.6 billion.

Despite the declines in the first quarter, the company is sticking with its full-year 2009 earnings estimate of $9.20 per share and said it is ahead of plan for reaching $10 to $11 per share next year.

"If anything I feel more confident in that objective," Loughridge said. That's because efforts that IBM began implementing last year to improve productivity and reduce spending are about to start paying off. "Much of our restructuring activity was front-end loaded in the year. We have that largely behind us, especially in the U.S., but the benefit is largely ahead of us," he said.

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Nancy Gohring

IDG News Service
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