Services hold IBM up in Q2

Currency conversion

IBM's services and software businesses carried it higher in the second quarter, while hardware revenue continued to wane.

IBM brought in $21.6 billion in revenue - a 10 percent rise from the $19.7 billion reported in the same quarter a year ago. Income hit $1.7 billion in this most recent quarter versus $445 million in last year's Q2. IBM, however, took a $1.4 billion charge in 2002 as a result of layoff costs and restructuring costs associated with the sale of its hard drive business.

IBM's earnings statements are always an adventure, as the company has more divisions, charges and various other accounting moves than most. In this year's second quarter, it should be noted that currency fluctuations - notably a weak dollar - helped IBM across the board.

Global Services revenue surged 23 percent to $10.6 billion in the second quarter. IBM signed $10.7 billion in services contracts during the quarter and benefitted from the addition of PwC Consulting.

Software revenue also increased 6 percent during the quarter to $3.5 billion. Middleware sales, which include the DB2 database, grew 7 percent to $2.7 billion and operating systems revenue increased 5 percent to $589 million. The results from Rational - acquired in the first quarter - are included in these results.

In constant currency, total software revenue actually fell 2 percent.

"You should expect continued improvement in software in the third quarter," said John Joyce, chief financial officer at IBM, during a conference call.

Total hardware revenue fell 1 percent - 6 percent in constant currency - to $6.6 billion. Sales of Intel-based and Power-based servers increased 10 percent, while the zSeries mainframe revenue fell 7 percent. Joyce said users could expect new encryption software in the third quarter and doubled channel capacity in the fourth quarter for the new TREX mainframe. IBM's CFO traced slow mainframe sales to the lack of the encryption code.

"The security feature is very important to the banking industry," Joyce said. "They were not going to buy the new TREX product until we had that. It did impact us in the quarter."

IBM noted that storage sales improved in the quarter with growth coming from its large, enterprise gear.

IBM has put a lot of investment in its chip fabrication business and picked up some nice wins such as Apple Computer with the G5, but officials say things are not progressing as hoped.

"The foundry business is the area where are not seeing the ramps we would like," Joyce said. "They are not ordering at a rate and pace that we had assumed."

The Personal Systems Group saw revenue fall 3 percent - 8 percent in constant currency - to $2.7 billion. Slow PC sales were the main factor in the decline, IBM said.

"These are good, solid results," Joyce said. "It is a tough market out there."

Investors appeared a tad less impressed during the after-hours trading session. Shares of IBM were down 2 percent, at the time of this report. ®

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