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Services, Software Keep Pace in IBM's Q2 Profit

IBM

UPDATED: IBM called its second quarter one if its best with a profit that rose by 22 percent, helped by strong performances in its global services divisions and continued strength in its software division.

Growth in emerging markets made a huge difference, but the company also saw solid results in every major global region, too.

Revenues for the tech bellwether were $26.8 billion, an increase of 13 percent (or 6 percent, adjusting for currency) compared with the same time last year. Profit was $2.8 billion (or $1.98 per diluted share), an increase of about 22 percent compared with the same quarter last year.

The results included a one-time gain for the sale of its Printing Systems Division (PSD), which IBM (NYSE: IBM) sold to Ricoh for $725 million.

Chief Financial Officer Mark Loughridge called the period "one of the best quarters I've ever seen," during a conference call today to discuss the results. They were so good, he added, that IBM would add another 25 cents to its full-year expectations to bring it to $8.75 per share. IBM now expects to see 22 percent growth over full-year 2007 results.

IBM saw continued momentum in emerging regions, with 20 percent sales growth in so-called BRIC countries -- Brazil, Russia, India and China -- Loughridge said. But even other major markets grew: 5 percent in the U.S., 11 percent in Canada, 4 percent in the U.K. and 5 percent in Italy, for example. "It was pretty broad based," he added.

Global services, the lion's share of IBM's revenues, hit its stride, especially in emerging global markets. Revenues were $10.1 billion, up by 16 percent. But factor in the currency exchanges, and the increase was 8 percent.

Meanwhile, global business services, another consulting segment, took in $5.1 billion, up 18 percent. Growth was 9 percent, however, when factoring in the currency exchange.

"We see both GBS and GTS performing well within their model of 6-8 percent revenue growth," Loughridge said. "We're quite encouraged by our services business."

The software division continued its strength, bringing in $5.6 billion in sales, a 17 percent rise over the same, year-ago period. The Websphere family of products stayed strong, but sales of its Information Management software, which help customers build on demand systems, were the big performers in the division with 30 percent sales growth.

Hardware stayed flat at $5.2 billion. Factor in the currency exchange, and it was actually down 3 percent. But not all was flat in the hardware division. Systems revenues grew 10 percent (4 percent, adjusting for currency), thanks to a boost in System z mainframe server products, which jumped by 32 percent compared with the year-ago second quarter.

The System z mainframe is gaining traction as a key underpinning of customers' move to virtualize their systems and consolidate their server costs. "We have customers doing [virtualization of applications] in the low 1,000s," Loughridge added. "This helps them reduce their costs of both IT and power consumption, which are important factors in today's economy."

IBM's CEO, Samuel Palmisano, was effusive in his statement. "IBM had an outstanding quarter and a strong first half for 2008," he said. "These results demonstrate that IBM has the ability to thrive in both emerging and established markets. Once again, IBMers performed very well around the world."

*Update adds executive comments from today's earnings call.