PwC, Rational Boost IBM’s Profit in Q2

Acquisitions combined with cost-cutting helped tech bellwether IBM declare a profit of $1.7 billion, or 98 cents per share, during the second quarter of 2003, results that were sharply higher than the same, year-ago period.

Revenues were up by 10 percent to $21.6 billion, not counting incremental charges of $1.1 billion after taxes.

The theme during the quarter ending in June was similar to the company’s first quarter results, during which its $5.1 billion acquisition of PwC Consulting helped boost Big Blue’s bottom line in global services.

The company’s net income of $1.7 billion from continuing operations was up by close to 288 percent compared to its net income during last year’s second quarter of $445 million. Earnings per share, which met analysts’ consensus expectations, were up by 292 percent from last year’s EPS of 25 cents per share.

Cost-cutting measures from last year were behind the key results, such as layoffs and exiting its hard disk drive manufacturing segment, but 2003 is also proving to be the year that acquisitions paid off for IBM.

Global services revenues were up by 23 percent to $10.6 billion, aided in no small part by the thousands of PwC consultants IBM inherited when it purchased PwC last year for $5.1 billion. The division now represents about half of IBM’s revenue base, and company officials said they expect that percentage to continue to increase.

The second quarter represented the first time that IBM’s acquisition of Rational Software, a provider of development testing tools for applications and systems that it purchased last year for $2.1 billion, showed up on Big Blue’s balance sheet. The difference in the division was clear.

John Joyce, IBM’s chief financial officer, said Rational was exceeding its profit expectations, and that IBM has already rolled out two new Rational-based products while integrating the company with its sales and development operations.

Software revenues, at $3.5 billion, were up by 6 percent compared to its second quarter of 2002. The same trends as seen in recent quarters applied as well: WebSphere middleware lines drove the increase. At constant currency comparisons, sales grew by 6 percent. Without the currency exchange factored in, however, sales of WebSphere lines were up by 14 percent for the quarter.

Without the strength of Rational and IBM’s WebSphere lines, the software division notched an otherwise middling quarter, with sales of other lines either down (at constant currency) or flat.

Hardware sales weren’t so lucky, which overall were down by 1 percent to $6.6 billion, or by 6 percent when factoring in constant currency comparisons. But results of different sub-divisions helped point to where IT managers and executives are putting their money.

IBM’s Systems Group, which includes its eBusiness server lines and storage systems, were up by 3 percent during the quarter thanks to strength in IBM’s Linux operating system-based server lines, such as its Intel-based xSeries.

Mainframe sales on UNIX-based pSeries also did well: its p630 line sold out, Joyce said during a conference call Wednesday. During the quarter, IBM also completed its transition from its Power 4 to Power 4+ processing architecture.

Within its storage lines, IBM’s Shark systems grew by 8 percent, during a quarter in which the division shipped virtualization and SAN volume controller as well as converter systems, integrated systems that it said eased pricing for customers.

Revenues from IBM’s iSeries midrange servers actually slid by 2 percent during the quarter, which Joyce said was due in part by weak sales in Europe, despite strong sales in Asia. He said as customers running older iSeries servers start to upgrade, and as IBM increasingly bundles its middleware lines with Linux capabilities, including building in Linux-friendly multi-processor environments, it expects demand to pick up during the year.

IBM rolled out its newest zSeries mainframe, the T-Rex, and found a tough sell with its key financial services customers, largely because the system did not ship with built-in secure key cryptography — a critical factor to banking clients, Joyce said.

But Joyce said the zSeries would ship with this functionality in the second half of the year, as IBM “will continue to make this platform more competitive.”

Still, for results that met analysts expectations and reflected some difficult trends in the IT industry, company officials said they were pleased.

Sam Palmisano, IBM’s chief executive officer, cited the double-digit
growth in Global Services as a key to the quarter. “We are also very pleased with our continued momentum in the small and medium-sized businesses, strengthened by a new line of ‘Express’ solutions aimed squarely at the needs of this fast growing customer base,” he said.

Looking ahead, company officials said they were staying focused on IBM’s on-demand strategy, which offers customers “pay-as-you-go” systems, while keeping expectations for the rest of the year “pragmatic.”

“Current IT demand is good, but not robust,” said Joyce.

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