IBM Q2 Profit Up on Steady Hardware, Software Gains

IBM continued its pace of steady growth, led by hardware and software sales, both of which grew 17 percent for the second quarter of 2011.

IBM continued on its growth course, with hardware and software gains pushing revenue up 12 percent and net income up 8 percent for the second quarter of 2011.

IBM reported revenue of $26.7 billion for the quarter, up from $23.7 billion in the same quarter last year. Net income in the latest period rose to $3.7 billion from $3.4 billion for the second quarter of 2010. Revenue for both IBM Software and IBM's Systems and Technology Group was up 17 percent. And the company continues to invest heavily in a growth-markets strategy that is paying off.

During a call with financial analysts to discuss the company's Q2 earnings, Mark Loughridge, IBM's chief financial officer, said IBM's software growth was driven by key branded middleware, which was up 21 percent. IBM's systems revenue was up 20 percent, with strong performance in System z, Power and System x servers. And Big Blue's total services backlog increased to $144 billion from $15 billion over last year, Loughridge said.

Moreover, Loughridge said growth-markets performance was strong, and revenue from these countries was up 13 percent. And the company saw continued momentum in all of its growth initiatives: growth markets, business analytics, cloud and Smarter Planet, he said.

"Since we announced our growth-markets unit in the beginning of 2008, the revenue growth rate has outpaced the major markets by an average of 9 points, on a local currency basis," Loughridge said. "With 13 percent revenue growth, this is the fourth consecutive quarter of double-digit revenue growth and share gains. We also had double-digit growth and share gains in each of the BRIC [Brazil, Russia, India and China] countries. The combined revenue in the BRICs was up 21 percent. But our success goes beyond the BRICs; we had double-digit growth in almost 40 growth-market countries."

In the growth countries, IBM saw a 24 percent increase in hardware sales. In fact, IBM gained 24 new mainframe customers in growth-markets countries since the introduction of the zEnterprise system last year.

"Think of it as planting the flag, which provides a great base for future growth," Loughridge said. "Our software business supports the growth markets build-out, with WebSphere providing key underlying infrastructure capabilities. This quarter, WebSphere grew almost 40 percent in the growth markets."

As evidence of its commitment to growth markets, IBM has been focusing on expanding its presence in Africa. The company recently announced the extension of a relationship with Bharti Airtel to provide IT solutions to its employees across 16 African countries, a strategic agreement with Commercial Bank of Ethiopia to modernize core banking systems and a collaboration agreement with the University of Ghana, Loughridge said.

During the second quarter, IBM's key branded middleware grew 21 percent, gaining share for the fifteenth straight quarter, the company said. WebSphere grew 55 percent over last year this time. And business process management grew 30 percent, spurred by IBM's Lombardi, ILOG and WebSphere products. IBM's information-management software business grew 18 percent. The software component of IBM business analytics grew 15 percent in the first half of the year. And the company's Netezza line continued to perform well, Loughridge said, adding that transactional volumes were up 70 percent year to year.

"IBM Netezza has more than a 10X price/performance advantage over Exadata for running analytics workloads," Loughridge said. "Since its introduction in 2009, when going head-to-head against competition in Proof of Concepts, the Netezza appliance has an 80 percent win rate."

IBM also saw gains in its other software areas. The Tivoli line grew 9 percent over last year, with storage-related Tivoli products growing 25 percent. And Lotus revenue increased 12 percent, driven by IBM's new social-business offerings.

In the hardware space, IBM's Systems and Technology Group saw an increase of 17 percent in revenue with the mainframe leading the charge. IBM's System z revenue grew 61 percent, year-to-year, and MIPS (millions of instructions per second) were up 86 percent. And IBM's storage hardware revenue rose 10 percent in the quarter.

"Over the past four quarters, revenue is up 49 percent, year-to-year, and MIPS up 59 percent," Loughridge said. "This has been the best four-quarter period in the past five years. Since the z196 started shipping in the third quarter of 2010, we have added 68 new System z customers, with more than one-third in the growth markets."

On July 12, IBM announced the zEnterprise 114 mid range server, which costs 25 percent less and delivers up to 25 percent more performance than the previous z10 business class system, Loughridge said. "It utilizes up to 14 processors running at 3.8 GHz, and can consolidate workloads from up to 300 competitive servers on a single z114."

Finally, services-the other dominant contributor to IBM's bottom line-delivered $15.1 billion in revenue, amounting to 10 percent growth over the same quarter last year. IBM has two services segments. IBM Global Technology Services grew 11 percent and IBM Global Business Services grew 9 percent. IBM's total outsourcing revenue was $7.1 billion, up 12 percent. And revenue for cloud-related services grew more than 200 percent, Loughridge said.

With growth markets and cloud computing paying dividends, IBM's other growth targets of business analytics and Smarter Planet also moved up. In cloud, IBM had over 2000 wins, year to date, Loughridge said. In the private cloud, IBM's average transaction size tripled from a year ago. In the first half of 2011, IBM's cloud revenue exceeded the company's results for all of 2010, keeping Big Blue on track to double its cloud revenue for the year, he said.

"In business analytics, we're helping our customers optimize the massive amounts of data they're dealing with," Loughridge said. "Through the first half, our business-analytics revenue was up over 20 percent, with good contribution from both software and services."

Moreover, IBM's Smarter Planet revenue growth in the first half was over 50 percent, he said. "This quarter, growth was driven by solutions in our telecom, health care and retail industries. We're also gaining traction in our Smarter Commerce initiative launched in the first quarter, and ramping our key Smarter Planet services contracts."