Update: IBM posts broad Q3 revenue growth

Global Services, Hardware groups show strong gains

IBM Corp. posted quarterly results on Monday showing 9 percent revenue growth from last year and slight earnings growth, despite a $320 million charge it took during the quarter to settle some claims in a lawsuit over its pension plan.

IBM's Global Financing revenue dropped 11 percent from last year's third quarter, but all of IBM's other business lines showed revenue growth, contributing to total revenue from continuing operations for the quarter of $23.4 billion, in line with the consensus estimate of analysts polled by Thomson First Call.

Armonk, New York-based IBM had net income for the quarter of $1.8 billion, up 1 percent from last year's third quarter. Per-share earnings would have been $1.17 without the lawsuit settlement charge, ahead of the $1.14 consensus forecast of Thomson First Call. Including the charge, IBM had per-share earnings of $1.06.

IBM's Hardware group showed the strongest growth, with revenue increasing 12 percent to $7.5 billion. Global Services remained IBM's most lucrative unit, with revenue of $11.4 billion, up 10 percent.

Servers based on processors with the x86 instruction set, such as Intel Corp.'s Xeon chip, were the fastest growing component of IBM's hardware business, with revenues up 26 percent year-over-year. This growth was driven in part by strong sales of the company's blade systems, which grew at more than 140 percent during the quarter, according to Mark Loughridge, IBM's senior vice president and chief financial officer. The company's xSeries group "is now emerging as a profit driver in our business," he said during a conference call with analysts Monday.

The company's pSeries Unix and iSeries minicomputer product lines did not fare as well, despite the introduction of new systems for both families based on IBM's next-generation Power5 microprocessor. The transition of iSeries customers to the new systems, in particular, was an "issue," with revenue from that product line dropping 26 percent from last year's figures, Loughridge said. "The iSeries transition is taking longer, I think, than we had expected," he said.

Global revenue from pSeries servers was up only 1 percent from the year-ago quarter. Sales were particularly hard hit in Europe, where revenue from the Unix systems declined 17 percent, driven by "an elongated transition cycle," according to Loughridge. Revenue for pSeries was up by 9 percent in the Americas and 8 percent in the Asia-Pacific region, he said.

The Global Services group suffered a high-profile setback in September when JPMorgan Chase & Co. canceled the remaining five years of a seven-year outsourcing deal valued at $5 billion, but IBM said at the time the cancellation would not affect its financials for the quarter, which ended Sept. 30. IBM said Monday it signed $10 billion in services contracts during the quarter and now has a backlog of $110 billion in contracted future services. That's a slight decrease from IBM's $118 billion backlog at the end of its second quarter.

IBM signed eight Global Services deals valued at over $100 million during the quarter, including one deal valued at over $1 billion, Loughridge said.

IBM's Software group increased its revenue to $3.6 billion, up 5 percent from last year's third quarter, with revenue for IBM's Tivoli infrastructure software growing 19 percent and its DB2 database software growing 15 percent. Revenue from Lotus, IBM's collaboration and messaging software, dropped 6 percent.

"After a difficult end to the second quarter, demand rebounded in the Americas and Asia, fueled in part by an increase in large deals," Loughridge said of IBM's software business.

Overall, the company reported "strong growth" in the Americas and Asia-Pacific regions, Loughridge said. "The U.S. had its strongest growth rate in over three years, as customers continued to invest for both efficiency and growth," he said.

China, Russia, India and Brazil were some of the fastest growing markets for IBM. Revenue for those four countries grew over 30 percent through the first three quarters of 2004, totalling $3 billion, Loughridge said.

However, revenue growth in Europe was flat, year-over-year, when adjusted for changes in currency, Loughridge said. Revenues in the U.K., France, Italy, and Germany were down from last year's numbers, he said.

IBM shares (IBM) were up over 2 percent from their Monday close of $85.92 in after-hours trading, reaching $87.90 per share on the Inet ATS Inc. exchange Monday evening.

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