Update: IBM posts strong profit, shows slow software growth

Big Blue's Global Services unit remains its revenue leader

IBM Corp. 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 Thursday.

IBM reported per-share earnings of $1.16, higher than the $1.12 consensus forecast of analysts polled by Thomson First Call. Net income was $2 billion, up 17 percent from last year's second quarter. Revenue for the quarter was $23.2 billion, up 7 percent year-over-year but below the $23.4 billion analysts expected.

IBM's Global Services unit remained its revenue leader, generating $11.3 billion, up 7 percent from 2003. IBM's restructuring in its hardware operations paid off, with 12 percent growth in revenue, to $7.4 billion. Its Personal Systems Group, which includes its PC manufacturing, turned the corner into the black, with net income of $27 million.

IBM's software group, however, stalled, posting a 0.4 percent revenue decline in the quarter, to $3.5 billion. For the first six months of the year, the group is 5 percent 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 remain active and the deals may close in the third quarter, when IBM expects a return to growth, he said during a conference call.

Loughridge branded IBM's software performance disappointing but touted 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 percent, 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 U.K. falling.

IBM's Global Services group signed 10 deals that were worth more than $100 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 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.

Thursday's quarterly conference call marked Loughridge's first as IBM's CFO. He assumed the position in May as part of an executive shuffle kicked off by sales head Mike Lawrie's departure for the chief executive position at Siebel Systems Inc.

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