Fourth-quarter profit at International Business Machines Corp. rose 11 percent and beat Wall Street expectations Thursday, and the company also delivered a blockbuster figure in services contract signings, an important measure of future revenue.
In the last three months of 2006, IBM earned $3.54 billion, $2.31 per share, on revenue of $26.3 billion. The numbers were boosted 6 cents per share by a lower tax rate and 5 cents per share from gains related to discontinued operations.
Even without those bumps, the company exceeded the consensus of analysts surveyed by Thomson Financial. Wall Street was expecting profit of $2.19 per share and revenue of $25.7 billion.
We had a very strong finish to the year, Chief Financial Officer Mark Loughridge said on a conference call with analysts.
Loughridge did not release specific guidance for future periods, but he did say he was comfortable with current earnings forecasts. We feel good about the momentum of our business as we enter 2007, he said.
Still, investors were not impressed. Shares of IBM lost $5.05, more than 5 percent, in extended-session trading. Before the results were announced, the stock lost 57 cents to close at $99.45 on the New York Stock Exchange.
The quarterly figures all surpassed last year's results, when profit was $3.19 billion, $1.99 per share, and revenue was $24.4 billion. However, profit in that comparison quarter was dragged down about $200 million after taxes, or 12 cents per share, by a one-time accounting charge and costs IBM incurred in freezing its pension plan.
In one sense, this quarter's performance echoed much of the way 2006 played out at Armonk, N.Y.-based IBM. The company struggled to find overall sales growth but rode cost cuts and software acquisitions to higher profits.
However, by another closely followed measure, services signings, IBM's fourth quarter might have marked a turning point. The company signed $17.8 billion in services contracts, a hefty leap from $10.5 billion in the prior quarter and $11.5 billion a year ago.
That could further galvanize investors who have already sent IBM's stock on a tear the past six months. Despite Thursday's decline, shares are still near their 52-week high.
Revenue from those services contracts - including a $4 billion-plus deal recently signed with the German government - will be booked over the course of several years. In the fourth quarter itself, IBM's services division posted revenue of $12.8 billion, up 6 percent from the prior year. Without currency fluctuations, however, the rise would have been 3 percent.
Improving that division's profitability has become a huge effort for the company. IBM is trying to lower the costs of its services projects by relying less on consultant labor and more on software and other repeatable assets. In the fourth quarter, however, the services unit's gross profit margin rose only slightly, to 27.9 percent from 27.4 percent.
The next-largest division, the hardware-focused systems and technology group, saw a 3 percent revenue rise, to $7.1 billion, but would have been flat at constant currency.
Meanwhile, software, IBM's most profitable unit, had a revenue gain of $5.6 billion, an increase of 14 percent - though it would have been 11 percent without fluctuations in the dollar. Loughridge called it software's best growth in five years.
For all of 2006, IBM earned $9.49 billion, $6.11 per share, on revenue of $91.4 billion. That marked a 20 percent increase in net profit from 2005, when IBM earned $7.93 billion, $4.87 per share, on revenue of $91.1 billion. The increase in earnings per share was even higher than the net profit figure because IBM spent $8 billion buying back its stock in 2006, reducing the number of shares on the market.