IBM’s Profit Falls on Charges, HDD Sale

Tech bellwether IBM’s profits tumbled during the second quarter of this year, a reflection of customers worried about the economy and the sale of its money-losing hard disk drive business.

The results were delivered in a split fashion because of the HDD unit sale, which IBM had said would contribute to a charge of between $2 billion and $2.5 billion this quarter.

Second quarter net income from continuing operations was $56 million, ($1.6 billion before the HDD sale and charges related to severance pay from layoffs), compared with $2 billion in profit in the second quarter of 2001.

IBM said revenues from continuing operations (which exclude the HDD unit) for the quarter were $19.7 billion, down 6 percent compared with the second quarter of 2001 when it took in $20.8 billion.

“Customers are giving orders a thorough review before signing,” said Chief Financial Officer John Joyce during a conference call. “Their focus remains on fast payback on investment. Europe has weakened, but the U.S. has shown a little better progress” in growing out of the technology recession. Indeed, throughout his remarks about each of the company’s units, Joyce mentioned the longer cycles that now accompany sales to IT professionals.

Global services’ $8.7 billion remained the company’s main driver at 44 percent of total sales, which slipped by about 1 percent year-over-year. Most of the unit’s gains were from strategic outsourcing and integrated technology services, both of which were up by 2 percent.

Software was the only division that produced gains in sales during the quarter, rising 7 percent to $3.3 billion compared to the year before and up 8 percent from the first quarter. WebSphere, IBM’s e-business middleware product, was up by 17 percent from a year ago and its database management software, DB2, jumped by 11 percent, helped in part by the acquisition of Informix, the company said. Together, WebSphere and DB2 middleware products, which comprise 80 percent of IBM’s software revenues, were up by 10 percent over last year.

Hardware revenues from continuing operations were down by 16 percent to $6.7 billion from last year, due largely to declines among low-cost server lines such as the new zSeries which was down by 19 percent and the pSeries servers which were off by 27 percent compared to last year.

Company officials said its more pricey xSeries line was up by 13 percent and that dSeries sales got a 14 percent boost due to a flurry of Linux activity with customers.

“We did very well on at the high end, but didn’t do as well at the low end with Intel-based servers starting to encroach on that market place,” Joyce said.

The company’s position in the public sector continued to remain strong, especially with data back-up and continuity planning, Joyce added. “The communications sector was the weakest” among its units. “Customers continue to be careful on services. But in this weak environment we held or gained ground in software, storage and most likely, global services,” Joyce said, referring to a backlog of services contracts in the company’s pipeline.

Its technology group was dominated by the ongoing realignment of the microelectronics division, which lost $389 million. IBM has been shutting down plants and cutting staff in its chip-making units to reflect the 30 percent decline in sales throughout the past year in what has become an increasingly commoditized business line. Personal computer sales fell too, which was reflected in the weak demand for chips.

Samuel J. Palmisano, IBM president and chief executive officer, said overall he was pleased with the results during what he called “one of the most difficult capital spending environments we’ve seen in decades.”

“Our software business achieved solid growth, gaining share across the middleware portfolio. We recorded our ninth consecutive quarter of new services signings of $10 billion or more. Also, we held overall share in server and storage systems in the face of pricing and demand pressures. Our margins improved sequentially, and the balance sheet remains strong.”

Earnings per share came in at 84 cents, but by taking out the impact of the sale of its HDD unit and costs associated with layoffs, the company reported 3 cents per share. During the same time last year, it earned $1.15 per share

The results were largely in line with prior guidance, albeit slightly ahead of most analysts’ consensus estimates.

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