Revenue Down at I.B.M., but It's Better Than Expected

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I.B.M. reported operating earnings for the second quarter that surpassed Wall Street's expectations, providing some reassurance to investors after a stumble in the first quarter.

But I.B.M.'s revenue was weak, down 3 percent, and well below analysts' forecasts. That suggests that even I.B.M., a powerhouse in recent years, is grappling with the challenges of a soft global economy and fast-changing technology.

The company's net income fell 17 percent to $3.2 billion, or $2.91 a share, compared with nearly $3.9 billion in the year-ago period. That includes a charge of about $1 billion for trimming its work force. I.B.M. announced in April that it would take that charge this quarter, and that most of the affected workers would be outside the United States.

In recent years, I.B.M. has taken annual charges of $500 million to $1 billion for what it calls "work force rebalancing." The company sheds workers in higher-cost nations and in businesses that are being trimmed back, and adds employees elsewhere, especially in India.

I.B.M. says the process reflects both financial discipline and globalization as it hires and invests in faster-growing markets. The net effect has been an expansion of its global work force to more than 430,000.

What is different this time, analysts say, is that the work force charge is being taken in a single quarter rather than spread across an entire year. The company's operating earnings, which exclude the charge for work force cuts, rose 3 percent, to $4.3 billion, or $3.91 a share. The result was well above the average analyst estimate of $3.77 a share, according to Thomson Reuters.

Earnings per share rose 8 percent, reflecting fewer shares outstanding, because I.B.M. steadily buys back its own shares. Revenue fell 3 percent to $24.9 billion, below the Wall Street forecast of $25.4 billion.

I.B.M. is the largest supplier of information technology -- hardware, software and services -- to corporations and government agencies worldwide, and its results are watched as a guide to broader trends in business technology spending.

Globally, the growth in technology spending has softened, as once-hot markets like China and Brazil cool off and Europe remains in an economic slump.

I.B.M. has met the challenge of economic turmoil and fast-changing technology markets more nimbly than most of its established rivals. It moved quickly to expand in emerging markets, shift to higher-profit products and services, and apply cost-cutting discipline.

But in the first quarter of this year, I.B.M. reported disappointing earnings, below analysts' forecast for the first time since early 2005. I.B.M.'s stock price has been flat so far this year, while the Standard & Poor's 500-stock index is up about 18 percent.

Investors were particularly eager to see if the second-quarter results showed that the disappointing results at the start of the year were a hiccup or perhaps the beginning of a trend.

Businesses that I.B.M. has earmarked for growth are thriving. These include software and services for mining vast amounts of data from the Web, sensors and smartphones, to be used to find ways to increase sales or cut costs.

But the question for established companies like I.B.M. is whether newer, more profitable businesses can grow fast enough to offset the competition from new rivals and new technology.

A prime example is cloud computing, a fast-growing market for computing sold to businesses as a service over the Internet.The low-cost cloud model threatens traditional technology suppliers. Amazon is the early leader in the cloud business.

I.B.M. is investing in cloud computing. Last month, it announced plans to buy SoftLayer Technologies, a cloud computing company, in a deal valued at about $2 billion.

"I.B.M. is making strong plays in new technologies like cloud, but the question is whether it is moving fast enough," said Frank Gens, chief analyst at IDC.

In the past, I.B.M. has also aggressively pulled out of areas with declining margins, like its personal computer business, which it sold to Lenovo in 2005.

Recently, I.B.M. has talked to Lenovo about a deal for I.B.M.'s unit that sells data center computers, typically powered by Intel chips. Talks apparently broke off in May, analysts say, when the two sides could not agree on a price. That business represents about $5 billion in sales for I.B.M., but competition is fierce.


This article originally appeared in The New York Times.


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