Big Blue Beats Lowered Estimates

Software soared and global services continue to grow. But IBM's third quarter revenues and profits were hit hard by plunging sales of hardware.

Software soared and global services continue to grow. But IBMs third quarter revenues and profits were hit hard by plunging sales of hardware. On Tuesday, IBM announced that its third quarter revenues dropped by six percent from the year-ago quarter, to $20.4 billion. Net income was $1.6 billion or 90 cents per share, a 19 percent decline from the $2 billion it earned in the year-earlier period.

The results slightly exceeded Wall Streets estimates. According to First Call, Big Blue was expected to report a third quarter profit of 89 cents per share on revenue of $20.86 billion. And while IBMs chief financial officer, John Joyce, said the fourth quarter will "certainly be challenging" he said the company expects to meet fourth quarter estimates of $1.35 a share on $24.4 billion in revenue.

Despite the dramatic declines in hardware sales, IBMs results were remarkably good given the plunging revenues and layoffs at other technology companies. "We continue to benefit from strength of our broad portfolio" of businesses, said Joyce. That growth, he said, was stoked by the companys "strong core of annuity-type businesses."

Joyce was clearly talking about the companys flagship division, IBM Global Services – which generated 41 percent of the companys revenues in the quarter. The services division signed new contracts worth $10 billion in the period, bringing its backlog to $97 billion.

In addition, overall gross profits in Global Services grew by nearly two points to 28 percent. Demand for services and Web hosting – for which the company has signed contracts worth $1.7 billion so far this year – "is as strong as weve seen," Joyce said. Revenue in the services division rose 5.4 percent to $8.7 billion from $8.23 billion in the year earlier.

The other bright spot is clearly software, the third largest division of IBM. Although software generated $3.2 billion in revenue in the third quarter - about 15 percent of IBMs revenue - it is the companys fastest growing division. Software sales grew by 14 percent over third quarter 2000.

In particular, IBM enjoyed dramatic growth of its WebSphere application server suite, which grew 75 percent compared to the year-ago quarter. MQ Series middleware grew by 120 percent and the database market, where IBM is going head-to-head with Oracle, grew by 31 percent, without including revenue gained from the companys recent purchase of Informix.

Joyce was eager to brag about WebSphere, which signed a major new customer during the quarter when online auction giant eBay agreed to use WebSphere as the basis for its next-generation auction platform. Joyce said that IBMs main competitor in the application server market, BEA Systems, is expecting flat or modest revenue growth compared to the big percent gains by WebSphere. "We are virtually tied for the lead in this [application server] market and expect to be number one shortly," he said.

Joyce also touted IBMs partnerships. He said the company generated more than $1 billion in revenue from 70 global alliances. "Our partnership strategy is paying off," he said.

IBMs hardware sales - its second largest source of revenue - fell by 21 percent to $7.5 billion. Particularly hard-hit were sales in PCs and original equipment microelectronics. IBMs laptop sales fell 28 percent and desktops fell by 30 percent. Sales of microelectronics, including semiconductors, fell by 28 percent to $1.5 billion. Sales of Intel-based servers fell by 25 percent.

The third quarter results were encouraging to Susan Eustis, president of Lexington, Massachusetts-based EverGreen Research. "IBMs revenue picture is better than their competitors and will continue to be so. Its fashionable to go with IBM again. And that sentiment will continue."