IBM Q3 Income Down 19% on Weak Spending

By @NY Staff

Deteriorating hardware sales, including personal computers and semi-conductors, drove International Business Machines’ third quarter net income down by 19 percent to $1.6 billion, or 90 cents per share, on revenues of $20.4 billion, the company said during an earnings conference call Tuesday.

But software, especially middleware products, and the surging global services division offset the quarterly results to help the technology bellwether meet and in some areas exceed expectations.

During the third quarter of a year ago, IBM earned $2 billion, or $1.08 per share. Total revenues for the quarter were off by 6 percent compared to the $21.8 billion it took in during the third quarter of last year.

Analysts polled had been expecting earnings of 89 cents a share on revenue of $20.8 billion.

Overall, hardware sales were down by 21 percent to $7.5 billion from the 2000 third quarter sales of $9.5 billion. But the company said its sales of z900 mainframe servers jumped by 42 percent, helped by a big sale to Wal-Mart, which is also using IBM’s high-end Shark disc storage system for its data center.

During a conference call, John Joyce, IBM’s chief financial officer, said he thought some of the declines in server sales might be related to customers waiting to test drive IBM’s latest high-end Regatta server that came out in October.

The Regatta, designed to work with a number of portable devices, including the latest low-power chips that help conserve power, is a key part of IBM’s drive for market share in emerging pervasive computing systems.

In addition, he said the company faced weaker market conditions than expected in September, which is usually the strongest month of the quarter.

“We saw a further slowing of already weak orders of PCs and OEM Microelectronic sales,” which dropped 30 percent sequentially, said Joyce, who also said he thinks the market in these two areas may have hit bottom.

Like its global services and software divisions, the semi-conductor sector is a key part of IBM’s e-business strategy of integrating customers’ platforms and computing devices.

As such, Joyce said he expects to gain share in both the desktop and mobile computing markets, but at much lower volume as the global slowdown in microelectronics works its way through the markets.

Global Services and software sales segments, especially middleware, continued their steady rise to help offset the decline in hardware sales.

Amid a yearlong global slowdown in technology consulting contracts, IBM’s global services revenues were up 5 percent over last year’s third quarter to come in at $8.7 billion for the period. Overall, services revenues represent over 40 percent of IBM’s total sales.

The services division’s outsourcing contracts rose by 13 percent and integrated technology services were up by 16 percent.

Not counting maintenance contracts, the services division revenues were up 7 percent.

Helping to explain the division’s glittering performance in an otherwise brutal market for services, revenues for IBM’s Web hosting and server consolidation sub-sectors jumped by 50 percent and 16 percent respectively.

Software sales were $3.2 billion, up 10 percent. IBM also made strides against its competition in the middleware sector, which grew by 18 percent with the WebShere and MQ Series products the top performers.

“The next generation of e-business is about integration of computing and communications. So a major shift is underway, in favor of integrated software and services,” which helped explain the jumps in middleware sales as well as Linux-based operating systems, Joyce said.

Louis Gerstner, Jr., IBM chairman and chief executive officer, said the third quarter saw an acceleration of the fundamental shift in customer buying behavior that is altering the landscape of the technology industry, which is more about integration of systems and platforms than buying hardware “boxes.”

The major trends with customers right now, added Joyce, is a focus on how to get cash back from their investments in information technology. And despite the economic conditions and lower outlook for corporate spending, customers are still trying to “tie their front end to their back end systems, and exploit the flow of information in between.”

Shares of IBM closed down 15 cents at $101.85 on the NYSE Tuesday, before the results were announced.

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