IBM Q2 Profits Increase, Sales Falter

IBM on Wednesday said second quarter earnings jumped 14%, but sales declined and fell short of analysts' expectations.

For the period ended June 30, IBM's earnings per share came in at $3.51, 8 cents ahead of Wall Street's predictions and up 14% from a year ago. Net income increased 5.9%, to $3.88 billion. Revenue, however, dropped 3.3% year over year, to $25.78 billion. Analysts were expecting sales of $26.3 billion.

"In the second quarter, we delivered strong profit, earnings per share, and free cash flow growth," said IBM president and CEO Ginni Rometty, in a statement. "This performance reflects continued strength in our growth initiatives and investments in higher value opportunities. These are fundamental elements of our long-term business model."

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IBM saw sales weakness across its product portfolio. Sales of IT outsourcing services fell 2% in the quarter, to $10 billion, while revenue from back office business services was off 4%, to $4.7 billion. Software sales were flat at $6.2 billion, while hardware sales fell 9%, to $4.3 billion.

Despite softness on the top line, IBM expects its profitability to increase. The company raised EPS guidance for the full year to $15.10 per share. "Looking ahead, we are well positioned to deliver greater value to a wider range of clients and to our stakeholders," said Rometty.

IBM has said publicly that it wants to achieve earnings of $20 per share by 2015. If it hits its 2012 target, it will still need to grow earnings by about 10% annually over the following three years to meet its 2015 goal. In the absence of top-line growth, Big Blue may need to cut jobs or find other efficiencies to meet its financial objectives.

On the legal front, IBM got some good news Wednesday when an Indiana high court ruled in its favor in a lawsuit filed against the company by the state's Family and Social Services Administration. The agency contended that IBM botched a job to build and run a welfare eligibility system. Indiana's Superior court rejected the claim, and ordered the state to pay the company a total of $52 million in costs and penalties.

"The court explicitly recognized the numerous and substantial benefits IBM delivered to the state during its leadership of the welfare modernization program," said an IBM spokesman. "The court's recognition of these accomplishments is a testament to the creativity and commitment of the many IBM employees who worked on behalf of the State of Indiana."

IBM shares were up 2.58%, to $193.10, in pre-market trading Thursday.

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