IBM Posts Solid First Quarter

IBM's strong quarterly results reflect the previous sale of its PC unit to Lenovo, but IBM Global Services remains stagnant.

Despite continued doldrums in its key services business, IBM posted a solid first quarter, thanks mainly to steady performance in software and hardware.

The worlds largest integrated vendor of information technology hardware, software and services reported $20.7 billion in revenue and profit of $1.7 billion, which was up 21 percent from the first quarter of 2005.

Revenue was down 10 percent, due to IBMs sale of its PC business to Lenovo. Adjusting of the sale of the PC unit and for currency fluctuation, revenues were up 4 percent, according to Mark Loughridge, vice-president and chief financial officer of IBM.

Loughridge called the results strong and attributed gains to IBMs exiting low-margin businesses, including PCs. The company had earlier gotten out of the display and hard disk drive businesses. At the same time, IBM has been acquiring software and services companies, Loughridge noted.

Summing up IBMs business strategy, he said, "Our strength is the ability to integrate and package to create solutions."

However, IBM Global Services, approximately half the company, continues to lag behind other IBM units. IGS was down 1 percent in revenue, although up 3 percent, adjusting for constant currency.

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But that rate was short of hardware, which was up 6 percent without the PC business and adjusting for constant currency, even though IBMs pSeries servers were in the midst of a product transition which dampened sales for the quarter.

All software, at $3.9 billion in sales, was up 2 percent; 6 percent adjusted for constant currency. Tivoli Websphere sales were up 26 percent and Tivoli sales increased 24 percent.

Lotus sales were flat, while sales in IBMs Rational unit declined 8 percent. Operating system sales suffered because of slow server sales in some models.

IGS had $11.6 billion in revenue for the quarter and $11.4 billion in new contract signings. However, Loughridge said the services business is strengthening, despite the apparent stagnation.

"Were beginning to see the expected turnaround in our services business. Were getting traction for initiatives of the last two quarters," he said, referring to layoffs in Europe and the hiring of workers in low-cost countries, mainly India.

While those measures tend to increase profitability, they dont bring in new business, a point noted by analysts.

During the quarterly earnings call with analysts, Laura Conigliaro, an analyst with Goldman Sachs noted that IBM will have to average $12 billion in business per quarter for the rest of the year to achieve solid growth and wondered, "Is there enough business out there?"

Bob Djurdjevic, president of Annex Research in Phoenix said: "The biggest challenge is to energize growth in IBM Global Services. When youre that big, its hard to grow at double digits. Indian firms can do that because they are much smaller."

He suggested that IBM may have to make its business units smaller to achieve more rapid growth. IBM did divide Global Services into three parts last year, but, said Djurdjevic, "The jurys still out," on that move.

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In hardware, the strongest growth was in xSeries blades, which grew 45 percent in volume and revenue. Storage sales grew 6 percent. IBMs microelectronics business, which caters to the makers of gaming devices, grew 37 percent for the quarter.

Loughridge also said the company is working to develop a completely global character by expanding in certain key countries: India, China, Brazil and Russia.

IBMs business in India grew 61 percent; in China 50 percent and in Russia, 48 percent. IBM now has 45,000 employees in India and China; the bulk of those are in India, where IBM will hold two days of analysts briefings in June.

"Well continue to shift investments to these markets," Loughridge said.

Although IBM froze its employee pension plan in January, the company still faces significant pension costs, which "create headwind," Loughridge said.

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