UPDATE - IBM posts strong profit, slow software growth

UPDATE - IBM posts strong profit, slow software growth

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 vendors, investors were looking to Big Blue for reassurance about the sector's strength - but while IBM's hardware and services businesses grew, its software group's revenue was essentially flat from last year, the company announced.

IBM reported per-share earnings of $US1.16, higher than the $US1.12 consensus forecast of analysts polled by Thomson First Call. Net income was $US2 billion, up 17 per cent from last year's second quarter. Revenue for the quarter was $US23.2 billion, up 7 per cent year-over-year but below the $US23.4 billion analysts expected.

IBM's Global Services unit remained its revenue leader, generating $US11.3 billion, up 7 per cent from 2003. IBM's restructuring in its hardware operations paid off, with 12 per cent growth in revenue, to $US7.4 billion. Its Personal Systems Group, which includes its PC manufacturing, turned the corner into the black, with net income of $US27 million.

IBM's software group, however, stalled, posting a 0.4 per cent revenue decline in the quarter, to $US3.5 billion. For the first six months of the year, the group is 5 per cent ahead of last year's revenue.

Newly appointed chief financial officer (CFO), Mark Loughridge, said IBM joined its rivals in seeing software deals slip out of 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 remained active and the deals might close in the third quarter, when IBM expects a return to growth, he said. Loughridge branded IBM's software performance disappointing but touted the company's strength compared to competitors that haf 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 per cent, 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 $US100 million each, while its hardware group reported strong sales of its zSeries and xSeries servers. Product transitions in the iSeries and pSeries lines crimped 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 could 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," Loughridge said.

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