IBM's 3Q Profit Rises 7 Percent

IBM's third-quarter 2011 profit rose 7 percent as the company performed well in its growth markets, services and software segments?ö?ç??particularly business analytics and the cloud.

IBM saw its third-quarter revenue rise 8 percent to $26.2 billion, largely based on the company's performance in growth markets, software and services. Moreover, IBM reported that net income in this interval grew 7 percent to $3.8 billion from $3.6 billion.

"In the third quarter, we drove revenue growth, margin expansion and increased earnings as a result of our innovation-based strategy and continued investment in growth initiatives," Samuel J. Palmisano, IBM chairman, president and CEO, said in a statement. "Growth markets delivered outstanding revenue performance across software, hardware and services, and contributed to the company's expanded margins. We also achieved strong results in Smarter Planet, business analytics and cloud."

IBM's third-quarter results were led by software, which saw revenue growth of 13 percent. Services revenue grew 9 percent, and IBM's Systems and Technology Group's revenue rose 4 percent. In addition, IBM experienced solid gains in its growth initiatives. Growth markets revenue was up 19 percent; business analytics revenue was also up 19 percent; IBM Smarter Planet revenue rose 50 percent; and cloud revenue year-to-date is already double IBM's cloud revenue for all of 2010.

"Consistent with our model, growth markets, along with our other key growth initiatives, are driving our revenue performance," Mark Loughridge, IBM's senior vice president and chief financial officer of finance and enterprise transformation, said during an Oct. 17 call with analysts.

Revenue from the company's growth markets increased 19 percent. Revenue in the BRIC countries-Brazil, Russia, India and China-increased 17 percent. Growth markets revenue represents 23 percent of IBM's total geographic revenue for the third quarter.

"We did well in the BRIC countries, but two-thirds of our growth market business lies outside of the BRIC countries," Loughridge said. "We're seeing significant growth in 40 growth-market countries, not just these BRIC countries. We have 36 other countries driving revenue" as part of IBM's growth markets strategy.

In addition, Loughridge said revenue from growth markets has been increasing several points more-and faster-than IBM's major markets over the last few years. What's more, he said, "The growth markets have a lot of margin capability." For instance, big banks in Africa and Asia are looking to rebuild infrastructure, which means new mainframe deals, he said, adding that the continued telecom boom in Asia represents a key opportunity.

"We see expanding potential there," Loughridge said of the growth markets. "It's not just a matter of capitalizing on expanding growth into these new markets."

The Americas' third-quarter revenue was $10.9 billion, an increase of 7 percent from the comparable 2010 period. Revenue from Europe/Middle East/Africa was $8 billion, up 9 percent. Asia-Pacific revenue increased 10 percent to $6.5 billion.

Meanwhile, revenue from the software segment totaled $5.8 billion, an increase of 13 percent. Revenue from IBM's key middleware products, which include its WebSphere, information management, Tivoli, Lotus and Rational products, was $3.6 billion, an increase of 17 percent, versus the third quarter of 2010. Operating systems revenue of $598 million increased 9 percent from the prior-year quarter.

Specifically, revenue from the WebSphere family of software products increased 52 percent year over year. Information management software revenue increased 12 percent. Revenue from Tivoli software increased 8 percent. Revenue from Lotus software increased 6 percent, and Rational software increased 7 percent.

In the information management space, IBM's Netezza grew 36 percent over last year. "Since its introduction in 2009, the Netezza appliance has won over 80 percent of the head-to-head proof of concepts against the competition," Loughridge said.

Forecasting IBM's future outlook in software, Loughridge said in his prepared remarks:

"Going forward, we continue to expand our software business both organically and through acquisitions, with a focus on higher growth segments such as Smarter Commerce, business analytics and security. We closed on the acquisition of i2 earlier this month. i2 helps customers in the public and private sectors address crime, fraud and security threats. We expect to close on the acquisition of Algorithmics and Q1 Labs later this year. Algorithmics expands IBM's capabilities in the financial services industry by helping clients quantify, manage and optimize their risk exposure across a range of financial risk domains. Q1 Labs helps clients more intelligently secure their enterprises by applying analytics to correlate information from key security domains and creating security dashboards for their organizations."

Revenue from the Systems and Technology segment totaled $4.5 billion for the quarter, up 4 percent from the third quarter of 2010. Systems revenue increased 6 percent. Revenue from Power Systems increased 15 percent, compared with the 2010 period. Revenue from System x increased 1 percent. Revenue from System z mainframe server products decreased 5 percent from the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), decreased 11 percent. And revenue from System Storage increased 8 percent.

"Hardware profit growth of 8 percent was led by Power Systems, where we had outstanding revenue growth and margin performance," Loughridge said. "We're continuing to drive competitive displacements and extend our share gains in Unix."

Loughridge also said the dip in mainframe sales was expected as part of the "typical mainframe cycle."

"System z revenue declined 5 percent, and MIPS were down 11 percent as we wrapped on the successful launch of our zEnterprise 196 in the third quarter of last year," Loughridge said. "Since the z196 started shipping a year ago, we have added over 80 new System z customers, with more than 30 percent of these in the growth markets."