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Software and taxes fuel IBM's big Q3

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Money talks, but for IBM it's software - and the odd tax adjustment - that walks. IBM recorded a 46.5 per cent growth in net income to $2.22bn on revenue up 5.1 per cent to $22.6bn, and earnings per diluted share of $1.45, compared to $0.94, for the third quarter ended September 30. IBM beat analyst expectations of $22.08bn revenue and $1.35 EPS.

Driving profits growth was software. Boosted by 19 acquisitions in nearly two years, software grew almost as much as IBM's hardware operations and streaked past the beached whale that is IBM Global Services.

Overall revenue for IBM's software grew 8.5 per cent to $4.4bn, with Tivoli taking top honors with a 44 per cent increase in revenue and WebSphere middleware coming second on 30 per cent. IBM has made six acquisitions supporting Tivoli and three for WebSphere since January 2005. Operating systems was the black sheep, falling six percent to $552m.

Hardware just squeezed past software, with 8.9 per cent revenue growth to $5.5bn for the quarter, but came in lower on gross margin - 37.7 per cent versus 85.3 per cent. Breaking hardware down, System Z and I servers came first and second with 25 per cent and 22 per cent growth.

Mark Loughridge, IBM's chief financial officer, told analysts that software was the firm's biggest "profit contributor. We've been investing heavily in our software business for some time. Our performance in 2006 underscores that this strategy is working," he said.

The Men in Black performed relatively poorly, with global services revenue grow just 2.7 per cent for the quarter to $12bn. Loughridge tried to strike an optimistic note, telling analysts IBM expects a "good" current quarter. Global services finished poorly, he said, because some big deals could not be closed before quarter end..

Uncle Sam also gave IBM's profits a boost. IBM's tax rate was 30 per cent, down from 48 per cent, as IBM paid an additional $525m related to the repatriation of earnings from abroad last year. ®

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