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IBM Profit Surges on Software Strength

Tech bellwether IBM's second quarter profit rose by close to 12 percent, driven by surging growth in software and strong demand across Asian and European markets.

The results beat expectations and reflected strong results across all divisions as well. Revenues rose to $23.8 billion for the quarter ended June 30th, up by about 9 percent over the same, year-ago quarter.

Net income rose to $2.3 billion, up by close to 12 percent over its profit of $2 billion in the second quarter of 2006. Diluted earnings for the second-quarter 2007 were $1.50 per share, not counting one-time gains, which is an increase of 15 percent year over year.

"I think every CFO waits for a quarter like this one," said IBM  CFO Mark Loughridge, during a conference call to discuss the results.

While the geographic results pointed to exploding growth in Asia, especially China in IT sales, IBM's earnings also underlined the ascendancy of software as a key segment for the company's strategy as it exits older business lines.

Revenues from the software division were $4.8 billion, an increase of 13 percent (or 9 percent when adjusted for currency differences.)

Middleware lines were key, such as WebSphere, Information Management, Tivoli, Lotus and Rational products. Together, sales of these lines rose by 16 percent compared to the same time last year.

The big standouts in the middleware family were the WebSphere lines, which rose by 28 percent, and Tivoli software, with a 33 percent uptick (Tivoli helps customers manage networks, security and storage).

Middleware now totals 53 percent of IBM's total software revenue. "This is the result of more than 30 years investment," Loughridge said of the division, which has become a major profit driver.

That would help explain IBM’s continued acquisition tear for this division. On Monday, it bought real-time data-integration software vendor DataMirror and last month acquired security and compliance testing software vendor Watchfire.

Asia-Pacific revenues were $4.6 billion, up by 10 percent, while strength in European markets, especially Germany, helped drive revenues in the Europe/Middle East/Africa region to $8.2 billion for the quarter, an increase of 13 percent or 6 percent when adjusted for currency differences.

Revenues from the Americas' were $10 billion, an increase of 5 percent.

Global services also came in strong, with sales of IBM's global business services division at $4.3 billion, up by 8 percent, and sales of its global technology services division rising by 7 percent to $8.8 billion.

Although the services division showed balanced and strong growth in all geographies, Loughridge said the results were also driven by selling new business into existing accounts. "This demonstrates that the best customer is the one you already have got," he said, noting also that India stayed hot in the outsourcing realm, with growth of nearly 150 percent.

Hardware sales stayed flat. IBM said its systems and technology division took in $5.1 billion for the quarter, which was about the same as the second quarter of last year.

Interest in virtualization, however, helped drive sales of IBM's system x server lines, and tape sales rose by 19 percent, with double digit growth in enterprise and mid-range data centers. Game console demand for its Cell chips was not as strong as anticipated, but represents only about a percent of the division’s revenues.

As a result, IBM added a penny to its full year earnings expectations to grow by between 14 and 15 percent.