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IBM Profit Grows as Taxes Shrink

Software and hardware revenue surges, but the company's services business disappoints.

October 18, 2006|From the Associated Press

NEW YORK — IBM Corp. handily topped Wall Street forecasts for the third quarter, with revenue growing 5% on strong sales of software and hardware.

The quarter's net profit of $2.22 billion marked a 50% improvement from a year earlier, thanks largely to a lower tax bill.

Net income for the three months ended Sept. 30 amounted to $1.45 a share. In the same period last year, IBM earned $1.52 billion, or 94 cents, as the company absorbed a $525-million tax expense on foreign earnings that were repatriated to the U.S.

Wall Street analysts expected a per-share profit of $1.35, according to a survey by Thomson Financial.

Armonk, N.Y.-based IBM's share price surged to a 52-week high after the report, rising $4.78 to $91.78 in after-hours trading. The stock had risen 24 cents to $86.95 in regular trading.

Third-quarter revenue totaled $22.62 billion, up from $21.53 billion a year earlier. Global services accounted for $12.02 billion of the tally, an increase of just 2.7%. Hardware sales improved 8.9% to $5.58 billion, while software revenue rose 8.5% to $4.41 billion.

Despite the better-than-expected showing, analysts peppered the company's chief financial officer with questions about another disappointing performance for the services business, which accounts for more than half of IBM's revenue.

Profit margins from the services business improved to 27.8% from 26.1% in the year-ago period.

But adding to the concerns voiced by analysts, IBM reported that the unit had signed $10.5 billion in new contracts, down 29% from last year and the second straight disappointing quarter for that indicator of future revenue.

The tally marked an improvement from this year's second quarter, when there were $9.6 billion in new contracts, but CFO Mark Loughridge acknowledged that a number of major deals expected to be finalized by the end of September "slipped out of the quarter."

IBM said its gross profit margin improved a notch to 42%, up from 40.6% in last year's third quarter.

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