IBM Profit up on Services, Middleware

Global services and middleware sales helped boost tech bellwether IBM’s revenues by 11 percent to $20.1 billion during the first quarter of 2003, thanks to its PwC acquisition and steady sales in its middleware software lines.

But ongoing cost-cutting measures, such as layoffs and exiting its hard disk drive manufacturing business during 2002, also made the difference in an IT sales environment that IBM executives continued to characterize as difficult.

Overall, Big Blue’s profit for the quarter was $1.4 billion, up 16 percent compared to its profit of $1.2 billion during the same first quarter of 2002. Earnings per share came in at 79 cents, up 8 percent compared to diluted earnings per common share of 73 cents in the same, year-ago quarter.

The result was one penny shy of analysts’ expectations, whose consensus forecast was 80 cents per share.

Global Services revenues, which accounted for 51 percent of IBM’s total revenues, grew by 24 percent (15 percent at constant currency) in the first quarter to $10.2 billion, a boost helped by the addition of the PwC Consulting, which IBM acquired for $3.5 billion in 2002.

Tom Bittman, lead IBM analyst for tech research firm Gartner said the backlog of $113 billion in services contracts during the quarter was encouraging, since he was expecting the global services to bring in closer to $14 billion. During the fourth quarter of 2002, IBM’s global services revenues were about $18 billion.

Software sales, which rose by 8 percent to $3.1 billion during the quarter, were among the company’s brightest spots. IBM’s WebSphere middleware lines were up by 14 percent (8 percent at constant currency) from the first quarter of 2002, its database management lines under the DB2 product grew by 22 percent (14 percent at constant currency).

Total hardware revenues from continuing operations were $5.8 billion, a decline of 1 percent (6 percent at constant currency), compared with the first quarter of 2002.

In the systems segment within hardware, which includes servers and storage, revenues from IBM’s xSeries Intel-based products increased by 20 percent, while its pSeries UNIX-based servers and iSeries midrange servers saw a 22 percent rise in revenue. Bittman said a jump in small and medium-sized business revenues helped fuel the jump in sales for i series servers.

But its z series line, which is often touted as a key component of its integrated Linux product offerings, fell by 16 percent compared to the same, year-ago first quarter.

IBM executives said revenues from zSeries mainframes dropped during the quarter in part because of customer deferrals of IT decisions and the anticipated introduction of a newer zSeries mainframe.

During a conference call to discuss the results, John Joyce, IBM’s chief financial officer, said the division ran into supply problems with its some of its x series servers as part of 1 percent slide in hardware revenues for that division.

Total deliveries of zSeries computing power as measured in MIPS (millions of instructions per second) increased by 3 percent during the quarter compared to the first quarter of 2002.

IBM said revenues from disk storage grew by 22 percent, helped by strong demand for its high-end “Shark” storage products.

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