IBM hits Q2 targets, says goodbye to PC business

IBM returned to form in the second quarter of its fiscal year, reporting income growth and solid revenue after scaring financial analysts by falling short of expectations in its first quarter.

IBM Chief Financial Officer Mark Loughridge said IBM had stronger hardware and software sales at the tail end of this quarter than it did last quarter, and reported that its product and services sales pipeline is strong. "I think our [services] backlog is in much better shape and is showing the recovery we looked for," he told analysts in a conference call following IBM's financial results release.

IBM's quarter, ended June 30, was eventful, filled with transactions generating nonrecurring costs and income. The company completed a $1.8 billion sale of its PC unit to China's Lenovo Group Ltd. (it booked a $1.1 billion gain during the quarter for the sale), received $775 million from Microsoft Corp. through an antitrust litigation settlement deal, and spent $1.7 billion on layoffs and restructuring costs. Excluding all those one-time charges, IBM had income of US$1.82 billion, up 4 percent from the prior year's second quarter. Per-share earnings from continuing operations were $1.12, ahead of the $1.03 consensus forecast of analysts polled by Thomson First Call.

IBM's revenue was $22.3 billion, down slightly from last year's $23.1 billion. Excluding PC sales from last year's calculation, total revenue increased 6 percent from last year, IBM said.

IBM's planned restructuring was more extensive than initially announced. The company said in April it would lay off 13,000 workers, but it ultimately cut 14,600 positions, mostly in Europe, Loughridge said. Eight thousand of those laid off have already left IBM.

Loughridge praised IBM's performance in Europe during the quarter. The company's $7.5 billion in EMEA (Europe, the Middle East and Africa) sales were flat when compared directly to last year's quarter, but up 4 percent adjusting for currency fluctuations and IBM's exit from the PC business.

"This is one of the most successful restructuring jobs I've seen done in this business in two decades," Loughridge said. "Hats off to Europe for really keeping the growth engine going."

IBM's closely watched Global Services business, which struggled last quarter to close deals and contributed to IBM's shortfall, grew 6 percent, to $12 billion. The company's backlog of services contracted for, but not yet billed, ended the quarter at $113 billion, down from $118 billion at the end of last year's second quarter.

One soft spot during the quarter was IBM's zSeries mainframe sales, which dropped 24 percent from last year. Loughridge attributed the decline to customers delaying purchases in anticipation of new products. Next week, IBM is planning to announce new zSeries servers, which will begin shipping in mid-September.