IBM Profit Up 16% on Strong Hardware Sales

IBM Corp., the world’s largest computer company, said Thursday that second-quarter profit rose more than 16% thanks to dramatically higher spending on computer systems and related services by businesses and other big customers.

Software sales, however, remained flat with the second quarter of last year.

“Growth in hardware was considerably ahead of expectations, and software was below expectations, but the net of it was a positive surprise,” said Mark Stahlman, a technology analyst with Caris & Co.

Armonk, N.Y.-based IBM earned $2 billion, or $1.16 a share, in the three months ended June 30, up from $1.7 billion, or 97 cents, a year earlier. Analysts surveyed by Thomson First Call had expected Big Blue to report earnings of $1.12 a share.

Revenue grew to $23.2 billion from $21.6 billion.

“For a company like IBM to beat the Street by 4 cents is a notable event given that they are basically a proxy for the entire IT [information technology] industry,” Stahlman said.

IBM shares, which fell 11 cents to $84.02 in regular trading on the New York Stock Exchange, jumped as high as $85.79 in extended trading after the results were released. They later settled back to about $84.40.

“The markets were very worried that tech companies would be disappointing, and IBM’s results give us confidence that tech spending is not collapsing,” said Michael Cohen, an analyst with Pacific American Securities. “There was a lot of panic with all the warnings in the last couple of weeks.”

IBM didn’t raise expectations for the second half, but Chief Financial Officer Mark Loughridge said he was comfortable with analysts’ estimates for the full year. Those surveyed by Thomson First Call expect sales of $96.3 billion and profit of $4.95 a share.

Sales of hardware rose 12% to $7.4 billion in the second quarter while revenue from services grew 7% to $11.3 billion, IBM said. Software brought in $3.5 billion, slightly less than a year ago. IBM doesn’t break out profit from its business units.

Stahlman noted that IBM had its first profitable quarter for its microelectronics business, which makes semiconductors. IBM lost $154 million in microelectronics in the quarter a year ago but reported an operating profit of $111 million this year. Stahlman said he was confident that microelectronics would be profitable for the full year.