IBM Scores with Software in Second Quarter

The company reports strong software revenue, but says its results in hardware and services lag.

Led by strong software sales, particularly in Tivoli and WebSphere products, IBM posted solid second-quarter results that met earnings targets.

Earnings were $1.30 per share, compared with $1.14 per share in the year-earlier second quarter, an increase of 14 percent. Second-quarter profit was $2 billion, compared with $1.9 billion in the second quarter of 2005, an increase of 9 percent. Without non-recurring items of 2005, the gain was 11 percent. Total revenues for the quarter were $21.9 billion.

Services and hardware continued to be question marks, however.

"Hardware and services didnt perform to our expectations," said IBM Chief Financial Officer Mark Loughridge in the companys quarterly earnings call.

Loughridge said IBM, based in Armonk, N.Y., is looking at plenty of services-contract opportunities in the third quarter, but the company will "have to execute" to realize that potential.

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Hardware results were hampered by IBM having fallen behind in shipments, in part due to a new hazardous materials law in Europe.

/zimages/4/62652.jpgLoughridge pointed to productivity improvements as an underlying factor behind the results. Those measures include big investments in India and an ongoing layoff program.

He also said sales to small and midsize businesses were stronger than those to enterprise customers. Sales in emerging markets such as Brazil, India and Russia were up, while sales in Japan and Germany were off, he said.

"Given how low the expectations were, there was only one way for the stock to go, which was up," said industry analyst Bob Djurdjevic, president of Annex Research, in Phoenix. He said the performance of IBMs zSeries mainframes, up 7 percent, year to year, was a pleasant surprise.

However, IBM Global Services, despite a major reorganization in 2005, still has not turned the corner with robust performance, he noted. "The problem IBM Global Services has is its size," he said, suggesting the unit needs to be split into smaller divisions.

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