Hardware Fuels IBM’s Q2 Profit

Helped by surging hardware sales and its own enterprise investments,
IBM’s profits jumped by 17 percent in the second quarter.

The results were reasonable enough for IBM to remain on track with
analysts and its own full-year expectations, after it largely met or exceeded analysts’
expectations for the quarter. IBM said it expects to see IT industry growth of 4.5
percent this year, the best outlook since 2000.

But a slowdown in software signings, which
left sales in that division flat for the quarter, had analysts reading the
tea leaves over whether the recovery in technology and IT spending might be
sputtering. IBM’s results largely kept those worries at bay.

Net income for the tech bellwether was $1.98 billion, up by just under 17
percent in the quarter, compared to its profit of $1.7 billion during the
same period last year.

Diluted earnings per share came in at $1.16, compared to $.98 per share
in the same period of 2003, an increase of 18 percent.

Overall revenue growth wasn’t as high however, coming in at $23.2 billion,
up 7 percent compared to $21.6 billion in last year’s second quarter.

Global services brought in the usual lion’s share of the money at $11.3
billion, close to half of the quarter’s revenues and up by 7 percent. But
when factoring in currency fluctuations, the division’s sales rose by 2

IBM counted $10.1 billion in new signings in the period. The division rode the outsourcing wave during the quarter. Revenues were up in every region in the outsourcing

Hardware, the next biggest moneymaker for Big Blue in the quarter, was
a big performer. Sales rose by 12 percent (10 percent at constant currency) to $7.4
billion, fueled by 44 percent growth in IBM’s zSeries mainframes. A key
element of IBM’s strategy of selling customers systems that can be deployed
on demand, or as usage needs fluctuate, IBM’s z990 lines helped the
division’s results as customers deployed the system for server
consolidation, said Mark Loughridge, chief financial officer.

Sales of IBM’s xSeries servers, where its smaller blade servers are
organized, grew by 18 percent.

IBM’s pSeries Unix server systems fell by 3 percent. Officials said the
line was dinged by slowing sales ahead of the launch of its new Power5 chip
system for Unix servers
, which happened only this week.

IBM blamed the wait for the Power5 launch on its sales of its midrange
iSeries line, which fell by 28 percent compared to the same time last year.

Overall, high-end systems were the strongest performers in the division; tape and mid-range disk drive sales for storage were also strong.

Systems and Technology, which helps make processors for servers, helped
deliver over $600 million worth of profit and contributed $4.2 billion of
the division’s revenue.

Software sales were flat at $3.5 billion. Without currency fluctuations,
however, sales actually fell by 4 percent, IBM said. During a conference
call with analysts Thursday, Loughridge said the company saw a number of
sales deferrals toward the end of the quarter. Global financing also slowed
by 3 percent, or 6 percent at constant currency.

“The average deal size declined,” Loughridge said. But the “majority of
deferred deals represent a good opportunity for us,” he added.

IBM’s Enterprise Investments and “other area” category, which includes
industry-specific IT solutions such as product life-cycle management
software, jumped by 23 percent (up 19 percent, adjusted for currency) in the
quarter, to $294 million.

In a statement lauding the results, Samuel J. Palmisano, IBM’s chairman
and CEO, singled out high-end server sales, especially the zSeries
mainframes. He also said the global services division was
off to a strong start with its Business Process Transformation Services, a
key part of helping to ease customers into purchases of new equipment that
can deploy on demand computing and IT services.

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