Software Key Profit Driver in IBM’s Q3

Helped by sales within key software business lines such as WebSphere and Tivoli, IBM’s  third quarter profit jumped 46.5 percent to $2.2 billion, (or $1.45 per diluted share).

Big Blue’s net income during the third quarter of last year was $1.5 billion (94 cents per share).

Acquisitions of software tools makers during the quarter helped, too.

IBM said total revenues for the third quarter were up 5 percent to $22.6 billion (or 4 percent if you factor in currency conversions). The results also reflected a one-time charge of $525 million related to taxes.

Key strength areas for Big Blue started in the software division. Sales were $4.4 billion, up by 9 percent (7 percent adjusted for currency) compared to the year-ago Q3.

“We grew in all five brands, especially WebSphere, Info Management and Tivoli,” said Mark Loughridge, CFO of IBM, during an earnings conference call today. “We also grew in all the major geographies.”

Loughridge said revenues from IBM’s middleware brands, which include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.4 billion, up 12 percent from Q3 2005.

The only raspberry in the software division were its operating systems revenues, which fell by 6 percent to $552 million.

But overall, Web services  and other software for service oriented architecture (SOA)  showed their strength in WebSphere sales. Revenues from other software and services increased, which includes the product lifecycle management portfolio.

Global services, which is still the major revenue builder for IBM at more than half its overall sales, saw a 3 percent increase in sales to close out the quarter at $12 billion.

“We fell short of expectations for longer term signings, which were down by 15 percent year-over-year,” Loughridge said.

Although shorter-term signings were up in the quarter, overall outsourcing signings fell by 29 percent in the quarter, which he said was due to a large number of opportunities that “slipped out” during the quarter.

Longer term contacts are becoming harder sells with many enterprise customers, who are increasingly going with shorter-term engagements over multi-year outsourcing contracts.

Although there was “contract erosion,” as Loughridge put it in the global services results, revenue growth was up overall in the division based on signings that re-upped from last year.

Business transformation outsourcing remains a key area, which overall was up by 150 percent year-over-year, helped by human resources, finance and accounting sectors.

While results were mixed, they were encouraged by improvement in short term businesses and overall profitability.

Hardware came on strong for IBM during the quarter at $5.6 billion, up by 9 percent over last year’s $5.1 billion.

The usual suspects pulled their weight: The systems and technology group (S&TG) pulled in $5.5 billion for the quarter, up 10 percent. IBM said S&TG revenues from its mainframe System z server products increased 25 percent over the same time a year ago.

Revenues from the System p UNIX server products increased 10 percent over the same, year-ago quarter and System x servers were up by 4 percent. But revenues from IBM’s System i servers decreased 22 percent.

In a statement, Samuel Palmisano, IBM’s chairman, president and CEO, called the quarter strong, and the “result of excellent execution and the repositioning of IBM’s business model to capture the growth and profit areas of a rapidly changing IT industry.”