IBM's signings of new business at its services division surged 16 percent in the second quarter, trouncing expectations and raising hopes that 2011 will be a good year for the technology sector.
Investors had feared that technology sales would slow in the second half, hurt by the economic uncertainty in Europe and Japan, as well as a drop in government spending. But IBM offset those challenges with strong growth in developing markets from Brazil to China, and robust sales of a new line of mainframe computers.
Analysts said the results marked a strong start to the tech earnings season, with other bellwethers such as Apple Inc, Intel Corp and Microsoft Corp set to report quarterly results in coming days.
As I look for the balance of the earnings reports this week, I think it's going to set a pretty good tone, said Keith Wirtz, chief investment officer for Fifth third Asset Management.
International Business Machines Corp shares climbed 2 percent to a record high on the news. The company also raised its full-year profit forecast after second-quarter results beat Wall Street estimates.
Good service signings reflect that they are capturing their share of the solid IT spending that we're seeing in the market now, said Edward Jones analyst Josh Olson.
IT spending and demand for software and services remains healthy despite all this economic turmoil, and businesses continue to invest in efficiency, he said. We're seeing that in these results.
IBM said on Monday that signings rose to $14.3 billion during the second quarter, beating Wall Street projections and easing investor concerns after the closely watched number dropped in the first quarter.
Deutsche Bank said in a research note that analysts on average had expected signings of $12 billion to $13 billion.
Investors believe signings is a key indicator of future profits. But IBM says the focus should be more on total backlog of business, which grew by $15 billion during the quarter to $144 billion.
Some $8 billion of the $15 billion increase in backlog came from the developing economies that IBM defines as growth markets.
WAITING OUT THE TURBULENCE?
Some investors had feared that corporations will keep a tight grip on 2011 technology budgets, waiting out the economic uncertainty in the United States and Europe.
But developing markets drove top line growth for IBM. On a constant-currency basis, revenue leaped 13 percent in growth markets -- which includes the BRIC countries of Brazil, Russia, India and China -- far outpacing the 3 percent sales growth chalked up in so-called major markets.
The growth in developing countries was led by sales to financial services firms and communications companies.
We've got real momentum in the financial service sector. It's a strong place for us, Chief Financial Officer Mark Loughridge said.
He added that business in Europe had improved, with sales in Germany and Italy returning to growth during the quarter.
IBM reported second-quarter profit, excluding items, of $3.09 per share, beating the average Wall Street forecast of $3.03, according to Thomson Reuters I/B/E/S.
Revenue rose 12 percent from a year earlier to $26.67 billion, ahead of the average forecast of $25.35 billion.
Shares in the Armonk, New York, company rose to $178.90 in extended trade, beating the previous record high of $177.76 on July 6. They had fallen 26 cents to $175.28 in regular New York Stock Exchange trade on Monday.
Analysts said Wall Street had priced in strong growth expectations, limiting the stock's after-hours rally.
Expectations are pretty high for this name right now. We've seen it do very well this year, up 20 percent or so to date, Olson said
Sales of IBM's Unix server computers rose 12 percent from a year earlier.
The company said it won more than 250 server accounts away from rivals, resulting in over $300 million in sales. About 60 percent of this came from Oracle Corp and 30 percent from Hewlett Packard Co, IBM said.
Both Oracle and HP declined to comment.
(Additional reporting by Alexei Oreskovic and Noel Randewich in San Francisco and Liana Baker in New York; Editing by Edwin Chan and Richard Chang)