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IBM up and optimistic in Q3

Hardware cuts mean services, software gains

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IBM's showed a modest revenue increase for the third quarter, but results were good enough for the vendor to say that the IT market has stabilized and even to say it will add 10,000 workers next year.

IBM posted revenue of $21.5 billion for the period, which marks a 9 per cent increase over the $19.8 billion posted in the same quarter a year ago. Income came in at $1.8 billion in Q3 versus $1.7 billion last year.

"We are beginning to see signs that the economy has stabilized," said Sam Palmisano, CEO at IBM. "As we look to 2004, more customers are expected to increase their investments in information technology. Next year, in fact, we see the need for approximately 10,000 new positions in key skill areas, including high-value services, middleware technologies, Linux and open standards-based hardware and software."

EMEA was the shining star for IBM in the quarter. Revenue in Europe, the Middle East and Africa surged 19 per cent year-on-year to $6.8 billion. AsiaPac posted an 11 per cent gain to $4.8 billion; the Americas rose but 4 per cent to $9.4 billion.

Services and software revenue continue to provide the bulk of IBM's business, accounting for 65 percent of revenue. IBM is proud to admit that it cuts hardware prices when competitive threats appear, hoping that a small hardware loss will lead to later services and software gains.

An example of this strategy comes from IBM's server and storage business, which saw revenue drop 1 percent in the quarter to $6.7 billion. IBM cut mainframe prices as much as 15 per cent during the period - one factor in the decline.

"We thought this was the right action to take to increase the competitiveness of the platform," said John Joyce, CFO at IBM, during a conference call. "We think you will see some more software as well as services opportunities around these MIPS."

IBM's mainframe business is being hit as Unix vendors march into Big Blue's territory. Joyce seemed to refer to competition from Sun Microsystems in two particular deals in China and Korea where IBM cut the cost of its mainframe to stave off the Unix threat. Still, the services and software keep coming.

So how did services and software fair?

Global Services revenue jumped 17 per cent to $10.4 billion, and software sales increased 11 per cent to $3.5 billion. These two businesses were the clear bright spots compared to the revenue dropping hardware group and PC business that grew revenue only 2 per cent to $2.8 billion.

The financial analysts were rather muted by IBM's results as compared to yesterday's Intel conference call, in which the "independent" pundits donned their cheerleader outfits. An endless stream of Intel analysts chimed in with "great quarter guys!" One IBM analyst did, however, find time to report on the Yankees vs. Red Sox game during the conference call. We're all paying attention, right?

Despite IBM's fairly optimistic outlook, investors did not appear impressed with the quarter. The sent shares down 3.25 percent, at the time of this report, to $89.70. ®

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