IBM raised its full-year outlook and reported stronger-than-expected quarterly results as companies increased spending on software and IT consulting, but the news failed to excite investors who had already begun to price in a strong recovery.
Shares of IBM fell 2 percent despite the positive numbers, mirroring the performance of other tech companies like Oracle Corp and Google Inc , whose investors had also locked in profits following a rally ahead of results.
IBM's shares have been particularly strong over the past week with investors anticipating the strong results, so there could be some near-term profit taking, said Edward Jones analyst Andy Miedler.
However, I think these results are strong. We like to see they have the confidence in their business so early in the year.
International Business Machines Corp, the world's largest technology services provider, raised its 2010 profit target to at least $11.20 from a previous forecast of at least $11.
Many analysts had not expected the company to change its outlook so early in the year, and the average Wall Street estimate had been for full-year EPS of $11.12.
Some analysts were slightly disappointed by IBM's quarterly gross margin of 43.6 percent. Collins Stewart analyst Louis Miscioscia had forecast 44.2 percent, but even he kept a buy rating and $160 price target on the stock after the results.
IBM said its first-quarter profit rose to $2.6 billion, or $1.97 per share, from $2.3 billion, or $1.70 per share, a year earlier. Analysts on average had expected EPS of $1.93, according to Thomson Reuters I/B/E/S.
Revenue rose 5 percent to $22.9 billion, accelerating from a 1 percent year-on-year gain in the previous quarter. Wall Street had forecast revenue of $22.7 billion.
Analysts said they were particularly impressed by its 18 percent rise in consulting services signings and 11 percent rise in software revenue.
IBM over the past decade has been shifting its focus from increasingly commoditized hardware to more lucrative software, IT services and consulting businesses.
Margins were slightly below what we expected but they made up for it in other areas. Importantly, we saw continued momentum in software and consulting that to me was important, said Peter Misek, analyst at Canaccord Adams. This wasn't a blockbuster or blowout report but it was solid.
Chief Financial Officer Mark Loughridge said the consulting deals it had recently won showed customers were now more willing to make longer-term investments in their business. Many had been focused on short-term, cost-cutting measures in the wake of the financial crisis.
We're starting to see a shift in customer buying patterns toward more transformational offerings, which are reflected primarily in our consulting business, he said on call with analysts.
Revenue growth was fairly consistent across geographic segments, it said, adding that government spending provided tail wind.
While services revenue rose 4 percent and systems and technology revenue rose 5 percent, although services signings fell 2 percent, IBM said.
Shares of IBM fell 2.1 percent to $129.40 in extended trading following the results report. It had closed up 1.22 percent at $132.23 on the New York Stock Exchange. The stock is still up about 6 percent from a low in February.
(Reporting by Ritsuko Ando, additional reporting by Jim Finkle, Gabriel Madway and Ian Sherr; Editing by Richard Chang and Tiffany Wu)