IBM Hits Profit, Misses Guidance

IBM reported a profit during its first quarter of 2005 but missed its
earnings guidance by five points. Big Blue blamed difficulty closing key
deals and signs of slowing growth in overseas markets as reasons for the
numbers that were just below what they laid out.

Net income was $1.4 billion for the quarter, up by about 2.9 percent from
its profit of $1.36 billion from the same time last year. IBM said revenues
from continuing operations for the first quarter were $22.9 billion, up 3
percent, compared with revenues of $22.2 billion for the first quarter of
2004.

Overall, first-quarter 2005 earnings per common share came in at 85
cents (including the effect of expensing share-based compensation), compared
with diluted earnings on a similar basis of 79 cents per share in the first
quarter of 2004, up 8 percent.

Most analysts polled were expecting EPS of 90 cents.

In a fairly rare admission, Samuel Palmisano, IBM’s chairman and CEO, said: “After a strong start, we had difficulty closing
transactions in the final weeks of the quarter, especially in countries with
soft economic conditions, as well as with short-term Global Services
signings. As a result, we did not achieve all of our goals for the
quarter.”

Middleware software and midrange systems results were solid, his
statement continued, and he said the company “grew significantly” in
Business Performance Transformation Services and in the emerging markets of
China, Brazil, India and Eastern Europe. “We returned nearly $4 billion to
investors in the quarter through share repurchases and dividends. We are
taking appropriate measures to sharpen our execution, as we continue to
implement our global growth strategies.”

Big Blue also cited its previously announced plans to expense equity
compensation costs during the first quarter as impacting its numbers
guidance, which it adopted in accordance with federal regulators’ guidance.

Global Services revenues, which pull in about half of IBM’s overall
revenues, rose by 6 percent (3 percent if adjusted for currency exchanges)
to $11.7 billion in the first quarter. Not counting maintenance contracts,
revenues for global services actually rose by 7 percent, or 4 percent
adjusted for currency.

Hardware revenues were flat, coming in at $6.7 billion during the first
quarter, about the same as a year ago. Take away the currency
exchange and revenues actually fell by 2 percent in the division. Within the
hardware division, the Systems and Technology Group carved out $3.9 billion
in revenues, up 2 percent from the same time last year.

Key drivers were
IBM’s pSeries UNIX servers, whose sales rose by 12 percent, and xSeries
servers, which rose 8 percent. Revenues for the iSeries midrange servers
increased 1 percent and storage systems and technology OEM revenue was up by
5 percent and 2 percent, respectively.

IBM said total delivery of zSeries computing power, as measured in MIPS
(millions of instructions per second), decreased 11 percent.

Software revenues came in at $3.6 billion, up by 2
percent, but flat if adjusting for currency exchanges.

The divison’s strong
performers — WebSphere, DB2, Rational, Tivoli and Lotus products — saw 3
percent revenue growth to $2.8 billion, up 3 percent versus the first
quarter of 2004. Key drivers in this group were the WebSphere lines, and
Tivoli, which grew by 11 and 15 percent, respectively. Revenues from
Rational software (integrated development tools) were flat compared with the
first quarter of 2004.

Analysts were bracing to see how the market reacts to IBM’s results when
trading in major markets resumes for IBM on Friday.

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