IBM Reports Flat 3Q

But Big Blue expects to see revenue benefits of as much as $1 billion in 4Q as a result of acquiring PwC.

Despite surprisingly poor software revenue and an overall information technology spending environment that IBM Chief Financial Officer John R. Joyce described as "one of the toughest…that we have ever seen," Big Blue reported a small increase in revenues and essentially flat earnings for the third quarter ended Sept. 30.

IBMs $19.8 billion in revenues for the quarter was .2 percent above the third quarter of 2001. Third-quarter earnings from continuing operations were $1.7 billion—the same figure IBM reported in the third quarter of last year.

The revenue and earnings figures did not include results from Pricewaterhouse Coopers LLPs consulting business, which IBM acquired earlier in October. Operating results also excluded results from IBMs hard disk drive manufacturing business, which the company is in the process of selling to Hitachi Ltd.

For the quarter, IBMs largest business unit, IBM Global Services, reported $8.9 billion in revenues, essentially flat compared to third-quarter IBM GS revenue from last year. IBMs services business, said Joyce, was hurt by extended selling cycles as many enterprise customers delayed signing outsourcing and other contracts in order to review return on investment estimates in a difficult economy. That was particularly true of IBMs largest customers. In fact, Joyce said, customers during the quarter deferred 11 long-term outsourcing deals, each valued at $250 million or more. That affected IBM Global Services signings and backlogs. For the quarter, the unit reported $9 billion in new deal signings, down from $11 billion reported last quarter. The value of its backlog of services contracts fell from $106 billion last quarter to $103 billion in the third quarter.

Sinking revenues from IBMs Lotus and Tivoli product lines dragged down the companys software business, which a year ago was growing solidly. Overall, software revenue fell 5 percent in constant currency compared to the first quarter of 2001. Revenue from Tivoli products fell 16 percent in the quarter, while revenue from Lotus products fell 15 percent. Revenue from the WebSphere family of app server products, however, grew 27 percent in the quarter. Revenue from IBMs DB2 database products was up 2 percent.

IBMs server revenue, meanwhile fell 3 percent in constant currency compared to the third quarter last year. Gains in revenues from the companys xSeries Intel-based revenues were more than offset by a dramatic drop in revenues from its iSeries servers. For the quarter, iSeries revenues fell 20 percent compared to the year-ago quarter.

IBM did, however, manage to slow the flow of red ink in its personal and printing systems business. The company reported that revenue from that business fell by 5 per cent to $2.7 billion and that losses in personal and printing systems amounted to $20 million. Still, said Joyce, that was an improvement over the $50 million loss the business reported in the third quarter last year. Joyce attributed the improved results to reduced expenses and both plant/field and channel inventories.

Looking ahead, Joyce warned that IBMs earnings will be reduced in the fourth quarter and in successive years by the need to put cash into the companys employee pension plans, which are experiencing reduced returns due to the poor economy. That will reduce IBMs earnings by $700 million next year, and up to $1.5 billion per year through 2005.

In the fourth quarter, Joyce said IBM expects to see revenue benefits of as much as $1 billion as a result of the addition of PwC. In addition, he said, IBM expects to experience a traditional fourth-quarter revenue increase of about 12 percent.

Although Joyce said IBMs goal is still double-digit earnings growth next year, he declined to predict a broad turn-around in IT spending by enterprise customers. If IT spending remains sluggish, Joyce said, the company will focus on market share gains in software and services. Right now, however, Joyce said IBM does not plan another round of restructuring such as the company carried out in the second quarter of 2002 when, analysts estimate, IBM laid off between 8,000 and 15,000 employees.