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Hardware Helps Propel IBM's Q3

Currency exchanges and continued strong sales in its hardware division helped fuel IBM's third quarter profit of $1.8 billion, but a one-time $320 million charge flattened out the bottom line results.

The Armonk, N.Y.-based computer giant said its net income reached $1.8 billion, up 1 percent over the same time last year. Without the one-time charge, IBM's third-quarter profit from continuing operations would have been $2 billion, up 12 percent, the company said.

IBM agreed in September to pay a one-time, pre-tax charge of $320 million (or 11 cents per diluted share) for the partial settlement of legal claims against its pension plan.

Overall revenues increased by 9 percent during the quarter to $23.4 billion from the same, year-ago quarter's take of $21.5 billion. Overall, the revenues were up by 1 percent from the second quarter of this year. The results met or beat most analysts' expectations.

In general, the company said its revenue growth was strong across all its divisions, helped by currency exchanges as well.

The hardware division had one of the strongest quarters of IBM's major divisions, up by 12 percent (9 percent, adjusting for currency) to $7.5 billion in the third quarter. Of that group, systems and technology delivered $4.1 billion, up 9 percent thanks to strong sales for IBM's xSeries Intel-based servers (which jumped by 26 percent year over year) and zSeries mainframes, which rose by 12 percent compared to last year. IBM officials said mainframes remain the hardware of choice for mission-critical applications.

During a conference call to discuss the results, IBM said its pSeries UNIX servers grew by 1 percent while sales in its iSeries midrange servers fell by 26 percent. IBM attributed this to some customers' transition to its new Power5 architecture. IBM released Power5 for pSeries first, then followed it with Power5 architecture for its iSeries line, which it just released Friday. Mark Loughridge, senior vice president and CFO, said the transition to Power5 among some customers is taking longer than the company expected.

But, he added, storage systems revenues increased due to good demand for external midrange disk and tape products, and revenues from OEM Technology increased. Also, strong growth in mobile person computers helped drive sales by 17 percent to $3.3 billion in the Personal Systems Group, its second consecutive profitable quarter.

Global services, which includes maintenance, was up by 11 percent to $11.4 billion. But adjusting for currency exchanges, the results were actually up by 5 percent. The company also said it signed nearly $10 billion in services contracts, which was a bit below expectations however. Big Blue ended the quarter with about $110 billion worth of backlog contracts.

Revenues from Software were $3.6 billion, an increase of 5 percent (but fairly flat at 1 percent when adjusted for currency exchanges) compared with the third quarter of 2003. The company said its revenues from its middleware brands, which include WebSphere, DB2, Rational, Tivoli and Lotus products, were $2.9 billion, up 6 percent versus the third quarter of 2003. Operating systems revenues decreased by 2 percent to $600 million compared with the third quarter of 2003.

In a statement, Samuel Palmisano, IBM's chairman and chief executive officer, said the results were one of the company's strongest third quarters in recent years, in what is normally a challenging quarter for the technology industry.

He also said he was keen on the outlook of the company's integrated business model as it looked toward 2005.

"We continue to see robust growth in key initiatives. Business Performance Transformation Services revenue grew more than 45 percent year-to-date. We saw more than 30 percent combined growth in the emerging markets of Brazil, China, India and Russia. And we're seeing more and more clients move toward becoming on demand businesses, which is driving demand across our portfolio."

Before the one-time charge, IBM's earnings per share came to $1.17, up 15 percent from the same time last year. After the charge, the results were $1.06 per share, up 4 percent from the same time last year.