Hardware Sales Drive Up IBM's Q3 Profits

IBM announced third-quarter 2010 net income of $3.6 billion, compared with $3.2 billion for the third quarter of 2009, an increase of 12 percent driven by significant increases in systems and technology sales and IBM services as well as a boost in growth markets.

Total revenues for the third quarter of 2010 of $24.3 billion increased 3 percent from the third quarter of 2009.

"Systems and Technology had its best revenue in six years," said Mark Loughridge, IBM's senior vice president and chief financial officer for finance and transformation, during IBM's earnings call with analysts. "We delivered another good quarter."

Revenues from IBM's Systems and Technology segment totaled $4.3 billion for the quarter, up 10 percent from the third quarter of 2009. Systems and Technology pretax income was $327 million, an increase of 46 percent. Systems revenues increased 8 percent. Revenues from System x increased 30 percent. Revenues from System z mainframe server products increased 15 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), increased 54 percent. Revenues from Power Systems decreased 13 percent compared with the 2009 period. Revenues from System Storage increased 7 percent, and revenues from Retail Store Solutions were flat year over year. Revenues from Microelectronics OEM increased 28 percent, IBM reported.

"In the third quarter we grew revenue in our hardware, software and services businesses, expanded margins and again increased earnings per share at double digits," said Samuel J. Palmisano, IBM chairman, president and chief executive officer, in a statement. "We achieved excellent performance in our growth markets unit, reflecting sustained investments through the downturn and the continued strength of the infrastructure build-out in these countries.

"Looking ahead, we are uniquely positioned in the enterprise, investing in high value segments like business analytics, advanced systems and smarter planet solutions. As a result, we are confident we can deliver strong business performance to grow profit, return value to our shareholders and to achieve full-year 2010 diluted earnings per share of at least $11.40."

From a geographic perspective, the Americas' third-quarter revenues were $10.2 billion, an increase of 3 percent from the 2009 period. Revenues from Europe/Middle East/Africa were $7.4 billion, down 6 percent. Asia-Pacific revenues increased 14 percent to $5.9 billion. OEM revenues were $806 million, up 27 percent compared with the 2009 third quarter.

Revenues from the company's growth markets organization increased 16 percent and represented 21 percent of IBM's total geographic revenue in the quarter. Revenues in the BRIC countries—Brazil, Russia, India and China—increased 29 percent, and 28 other growth market countries also had double-digit revenue growth, adjusting for currency. Growth market revenues for both servers and storage increased by more than 20 percent in the quarter. IBM now has 103 sales offices in the growth market countries after opening 40 offices in 2010, the company said.

Meanwhile, IBM's total Global Services revenues increased 2 percent. Global Technology Services segment revenues increased 1 percent to $9.5 billion. And IBM Global Business Services segment revenues were up 5 percent at $4.6 billion.

Revenues from the Software segment were $5.2 billion, an increase of 1 percent. However, the segment showed a growth rate of 6 percent excluding the first-quarter divestiture of the Product Lifecycle Management (PLM) operations, compared with the third quarter of 2009. Revenues from IBM's key middleware products, which include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.1 billion, an increase of 7 percent versus the third quarter of 2009. Operating systems revenues of $550 million increased 6 percent compared with the prior-year quarter.

Loughridge said revenues from IBM's WebSphere family of software products increased 14 percent year over year. Information Management software revenues increased 5 percent. Revenues from Tivoli software increased 9 percent. And revenues from Lotus software and Rational software were flat.

Meanwhile, revenues from the company's business analytics operations across services and software segments increased 14 percent. "And with the acquisitions of Sterling Commerce, Coremetrics and Unica we expect to see continued growth in this segment," Loughridge said.

Overall, in the third quarter, IBM made 11 acquisitions for a total of $11 billion, Loughridge said, noting that it is part of IBM's aggressive strategy to continue to grow its portfolio, particularly in the areas of analytics, cloud computing and Smarter Planet activities.