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Users stall IBM on service contracts worth £1.7bn in three months

IBM has seen 11 major service deals, each worth more than $250m (£161m) deferred in the past three months as user organisations put their IT spending under stricter scrutiny.

The company made the admission as it reported flat third-quarter results. Despite the economic slowdown, the company intends to follow up its purchase of the technology consulting unit of PwC with a buying spree.

Revenue for the quarter was $19.8bn (£12.75), down 2% year on year with profits of $1.7bn (£1.1bn) from ongoing business.

This quarter was "one of the toughest operating and spending environments we have ever seen," IBM chief financial officer John Joyce said.

"We began this year cautiously optimistic about the economy and the overall information technology industry. But almost immediately we saw the economy slowing and customers rethinking their information technology spending priorities."

IBM has spent the past year rebalancing its operations around what it sees as the IT industry's "profit opportunity" shift toward software and services, he said.

IBM Global Services, the company's most profitable division, posted 2% revenue growth, to $8.9bn, in the third quarter, which ended on 30 September.

It was also hardest hit by redundancies, with IBM laying off 15,000 employees this year, the vast majority in its Global Services unit.

More redundancies could follow IBM's $3.5bn (£2.25bn) purchase of PwC Consulting, which has brought 30,000 new employees into the company's new Business Consulting Services group.

Software revenue dropped 3% year on year. Revenue from IBM's DB2 database software grew 2% and revenue from its WebSphere portfolio grew 27%. Declining revenue from its Tivoli and Lotus units, and from operating system software, dragged down the software group's performance, IBM said.

Lotus revenue dropped 15%, while Tivoli revenue dropped 16%, Joyce said, as a result of slowing new licence sales in a "mature" market.

The size of individual software deals is decreasing as customers seek out smaller investments promising quick returns, Joyce added. IBM is seeking to expand its customer base, particularly among mid-sized companies, but that growth has not yet been sufficient to offset other losses, he said.

"The biggest change that we've seen is that customers are now spending much more time analysing their IT investments. They're taking a lot more time to make sure that they are going to receive the returns based on the investment. So it's elongating the sales cycles," Joyce said.

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