IBM rides software revenue to Q2 profit

IBM rides software revenue to Q2 profit

Led by strong performance in its software business, IBM on Tuesday posted second quarter profits up nine percent from last year.

The company earned US$2.0 billion in the quarter ending June 30, compared to US$1.9 billion in the second quarter of 2005.

Per share earnings were US$1.30, which marked a 14 percent increase over US$1.14 last year. The company also beat expectations from analysts polled by Thomson Financial, who had predicted earnings of US$1.29 per share on revenue of US$21.89 billion.

IBM reported revenue of US$21.9 billion, down 2 percent from last year. When adjusted for the company's May 2005 sale of its PC business to China's Lenovo Group, the result was up one percent.

The most profitable business segments in the second quarter were software, microelectronics and IBM's System z mainframe computers, said Mark Loughridge, senior vice president and chief financial officer, during a conference call with analysts and reporters.

The strength of those areas offset losses in IBM's server segment, where problems in the supply chain left some orders unfulfilled, and in services, where short term orders were weaker than expected.

"While some areas of our business did well, others leave room for improvement," Loughridge said.

The company was able to compensate for its weaknesses through a renewed focus on its highest-margin businesses, IBM Chairman and CEO Samuel Palmisano said in a statement.

Under that process, IBM cited low margins as the main reason it jettisoned its PC line to Lenovo last year. Likewise, IBM has boosted its investment in high-margin segments like its software and services businesses.

Revenue from the company's software division rose five percent to US$4.2 billion this quarter, with the great majority -- US$3.2 billion -- generated by IBM's middleware brands, including WebSphere, Information Management, Tivoli, Lotus and Rational. The remainder came from operating systems and product lifecycle management.

In contrast, the Lenovo sale contributed to a drop in IBM's hardware business, where revenue fell seven percent to US$5.1 billion. Discounting the effect of the divested PC business on 2005 numbers, hardware revenue actually rose three percent.

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