IBM posts strong profit despite fall in software

IBM comfortably met analysts' earnings expectations for its second quarter but fell slightly short on revenue, suggesting that...

IBM comfortably met analysts' earnings expectations for its second quarter but fell slightly short on revenue, suggesting that it, too, is feeling the effects of postponed spending.

After a rash of earnings warnings from software suppliers, investors were looking to IBM for reassurance about the sector's strength - but while its hardware and services businesses grew, the software group's revenue was essentially flat from last year.

Revenue for the quarter was $23.2bn, up 7% year-on-year but below the $23.4bn analysts expected.

IBM's Global Services unit remained its revenue leader, generating $11.3bn, up 7% from 2003.

The company's restructuring in its hardware operations paid off, with 12% growth in revenue, to $7.4bn. Its Personal Systems Group, which includes PC manufacturing, turned the corner into the black, with net income of $27m.

IBM's software group posted a 0.4% revenue decline in the quarter, to $3.5bn. For the first six months of the year, the group is 5% ahead of last year's revenue.

Newly appointed chief financial officer Mark Loughridge said IBM joined its rivals in seeing software deals slip during the quarter.

Software sales are weighted toward the end of quarters, and in the final week of this one some of IBM's potential deals were not signed. A number of those prospects remain active and the deals may close in the third quarter, when IBM expects a return to growth, Loughridge said.

He described IBM's software performance as disappointing but pointed to the company's strength compared to competitors that have no other lines of business to buffer weak software sales.

Overall, IBM sees strong spending. "We continue to see the IT industry growth around 4% to 5%, which is the best it has been since 2000," Loughridge said.

Geographically, IBM saw its strongest growth in the Asia-Pacific region, powered by sales in China. All three regions in the Americas were up, while European results were mixed, with sales in Germany, Italy and the UK falling.

IBM's Global Services group signed 10 deals that were worth more than $100m each, while its hardware group reported strong sales of its zSeries and xSeries servers.

Product transitions in the iSeries and pSeries lines held up sales during the quarter, as customers awaited new products that will begin shipping within a few months.

Loughridge credited IBM's work during the past few years on internal transformation with sustaining its profit growth, despite revenue challenges in some segments.

With its strengthened supply-chain and sales opportunity-management systems, IBM can quickly direct resources toward areas of demand, he said.

"The linkage between the opportunity and supply chain, together with the breadth of our businesses, allows us to drive more consistent, predictable results than other technology companies," he said.
Stacy Cowley writes for IDG News Service


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