IBM Upgrades 2009 Outlook on Q2 Rise in Profit

IBM announces second-quarter profits of $3.1 billion, up 12 percent over the same period in 2008, despite seeing a 13.3 percent dip in revenues. IBM also increases its earnings outlook for 2009 to earnings per share of $9.70, up from $9.20.

IBM announced on July 16 second-quarter profits of $3.1 billion, up 12 percent over the same period in 2008, despite seeing a 13.3 percent dip in revenues.

Mark Loughridge, IBM senior vice president and chief financial officer, said IBM's margin improvements offset the lower revenue, so much so that IBM raised its expectations for the company's financial position for the rest of the year. Loughridge said IBM now expects its earnings per share for 2009 to be about $9.70 versus early projections that earnings per share would be only about $9.20.

Despite the revenue drop, "The real driver was our gross margin expansion," Loughridge said. "This performance is the result of the strategic transformation of our business ... to focus on high-value areas, and globally integrating the company. These changes to the company have allowed us to deliver improved performance in a tough economy."

Second-quarter net income was $3.1 billion, compared with $2.8 billion in the second quarter of 2008, an increase of 12 percent. Total revenues for the second quarter of 2009 of $23.3 billion showed a decrease of 13 percent from the second quarter of 2008.

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"We have continued our strategic investments in Smarter Planet solutions, business analytics and next-generation data centers," said Samuel Palmisano, IBM chairman, president and CEO. "As a result we are optimistic about how IBM is positioned to make the most of current growth opportunities as well as those that emerge as the economy recovers. We are well ahead of pace for our 2010 road map of $10 to $11 per share."

"I think we had a very strong quarter," Loughridge said.

It depends on how you look at it. For instance, from a geographical perspective, IBM's Americas second-quarter revenues were $9.9 billion, a decrease of 9 percent from the 2008 period. Revenues from Europe/Middle East/Africa were $7.9 billion, down 20 percent. Asia-Pacific revenues decreased 7 percent to $4.9 billion. OEM revenues were $537 million, down 24 percent compared with the 2008 second quarter. Revenues from the company's growth markets organization decreased 11 percent and represented 18 percent of geographic revenues, the company said.

Down, down, down, down, down.

Total Global Services revenues decreased 12 percent; pre-tax income increased 23 percent. Global Technology Services segment revenues decreased 10 percent to $9.1 billion. Global Business Services segment revenues decreased 15 percent to $4.3 billion. IBM signed services contracts totaling $14.0 billion, at actual rates, a decrease of 5 percent, including 17 contracts greater than $100 million. Signings in Consulting and Systems Integration and in Integrated Technology Services were $6.0 billion, a decrease of 14 percent.

However, total outsourcing signings increased 3 percent to $8.0 billion. The estimated services backlog June 30 was $132 billion at actual rates compared with $126 billion March 31.

Meanwhile, revenues from the Software segment were $5.2 billion, a decrease of 7 percent compared with the second quarter of 2008. Revenues from IBM's key middleware products, which include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.0 billion, a decrease of 2 percent versus the second quarter of 2008. Operating systems revenues of $529 million decreased 11 percent compared with the prior-year quarter.

Revenues from the WebSphere family of software products increased 8 percent year over year. Revenues from Information Management software, which enables clients to leverage information on demand, decreased 4 percent. Revenues from Tivoli software, infrastructure software that enables clients to centrally manage networks including security and storage capability, decreased 2 percent, and revenues from Lotus software, which allows collaborating and messaging by clients in real-time communication and knowledge management, decreased 14 percent. Revenues from Rational software, integrated tools to improve the processes of software development, decreased 2 percent, Loughridge said.

However, Cognos and Ilog "had a very good quarter," Loughridge said, adding that the analytics capabilities in those products will help fuel the business analytics practice IBM launched earlier in 2009. He said later in July IBM will launch a new business analytics system that will make use of the company's hardware, software and services expertise.

IBM's hardware business took the biggest hit. Revenues from the Systems and Technology segment totaled $3.9 billion for the quarter, down 26 percent, IBM said. Perhaps most chilling result was that revenues from IBM's System z mainframe server products decreased 39 percent compared with the year-ago period. And total delivery of System z computing power, which is measured in mips, decreased 20 percent, the company said.

"We see hardware stabilizing and returning to profit growth in the fourth quarter," Loughridge said. "I think when the economy turns we have real leverage to capitalize in the growth in 2010."

Loughridge said since 2002, IBM's revenue from software and services has more than doubled in one case and nearly doubled in another. Regarding software, in 2002 IBM generated $2.8 billion and in 2008 the company pulled in $8 billion. In terms of services, in 2002 IBM earned $4.5 billion and in 2008 the company made $8 billion on services also, he said.

Despite revenues being down, the fastest-growing segment for IBM in the second quarter was the public sector, where education, health care and government led the way, Loughridge said.

Loughridge said IBM's Smarter Planet initiative and the company's cloud computing efforts will soon begin to bear fruit. He also noted that up to 25 percent of IBM Research projects have some relationship to the company's Smarter Planet strategy.

In addition, Loughridge said net income for the six months ended June 30, 2009 was $5.4 billion compared with $5.1 billion in the year-ago period, an increase of 6 percent.