IBM's quarterly revenue missed Wall Street's expectations and a decline in services contract signings further damaged investors' confidence, sending its shares down 3 percent.
While firm growth in the company's higher-margin software unit and sales in emerging markets bolstered profit, the results were not as good as investors wanted to see from the world's biggest technology services company.
International Business Machines Corp said its second-quarter revenue rose 2 percent to $23.7 billion. Analysts on average had expected $24.2 billion, according to Thomson Reuters I/B/E/S. (IBM earnings graphic: http://link.reuters.com/ryb48m)
IBM blamed currency rates for reducing revenue by about $500 million in the quarter, but analysts said they were also concerned about some numbers, including signings of services deals, a key indicator of future revenue.
IBM said signed services contracts fell 12 percent to $12.3 billion. Total outsourcing services signings decreased 19 percent to $6.5 billion, it said.
There were some currency hits that people were expecting, but even with that, it might have been a little bit weaker than people were expecting, said Mark Demos, portfolio manager at Fifth Third Asset Management, an IBM shareholder.
Demos said the decline in services signings was particularly disappointing.
Net profit slightly exceeded expectations and rose to $3.4 billion, or $2.61 a share, from $3.1 billion, or $2.32 a share, a year earlier. Wall Street had forecast $2.58 a share.
Despite the solid showing in its bottom line, the company's shares fell 3 percent after-hours to $125.60 after closing at $129.79 on the New York Stock Exchange.
The company's higher outlook for full-year earnings -- of at least $11.25 per share, up from at least $11.20 previously -- helped little.
IBM shares have fallen about 2 percent over the past quarter as investors focused on technology companies such as Apple Inc and VMware Inc which are enjoying double-digit revenue growth.
Expectations were for $14 billion or flat. They were down 12 percent year over year, Fifth Third Asset's Demos said. Things are improving -- we're coming out of the recession -- and services signings is one of the indicators that people would like to see at least grow from year over year.
He added that the decline in services signings was especially disappointing because two key rivals, Accenture Ltd and Infosys Technologies Ltd , had recently posted solid bookings.
It's all about top-line and 'what have you done for me lately?' said Keith Springer, president of Capital Financial Advisory Services.
These earnings are not justifying the stock market to rise another 10, 20 to 30 percent from current levels. The market is taking a negative view even though the earnings are pretty good.
(Reporting by Ritsuko Ando; Editing by Richard Chang)