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Software team codes IBM higher in Q2

Expenses surge

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Every quarter IBM orders investors to pay attention to a particular product group as the driver of its success. For this year's second quarter, IBM has promoted the software division as its savior. That's software - not services. Got it?

IBM sold a lot of stuff during Q2. In fact, it sold $23.8bn worth of goods and services, notching a 9 per cent increase in revenue over the same period last year. Revenues increased just 6 per cent in constant currency. Net income rose a healthy 10 per cent to $2.3bn, despite increased costs. All told, IBM ended up posting earnings per share of $1.57 - up 17 per cent from $1.31 in last year's second quarter.

These results left CEO Sam Palmisano's quotation writers in a decent mood.

"This quarter's strong revenue growth - our best since 2001 - underscores IBM's global capabilities, as well as the higher value that clients place on our expanding software product line and wide range of services offerings that are helping them transform their businesses," Palmisano said, in a statement.

IBM's CFO Mark Loughridge, only partially aided by the PR team, reiterated these sentiments during a conference call with financial analysts to discuss the quarter.

On multiple occasions, he stressed that Q2 marked IBM's "best revenue growth in years." In addition, he thinks the global economy is humming along well enough to keep IBM flush with sales throughout 2007.

"I do think we saw a relatively improving economy," Loughridge said.

IBM's revenue jumped 6 per cent in the Americas region to $10.1bn. Revenue in EMEA rose 13 per cent (6 per cent in constant currency) to $8.2bn, and revenue in Asia-Pac jumped 10 per cent to $4.6bn. (Meanwhile, OEM revenues slid 9 per cent to $852m.)

The mighty - and Krispy Kreme-filled - Global Services unit kicked revenue 10 per cent higher (7 per in CC). The Technology Services division pushed revenue to $8.8bn from $8.0bn in the same period last year, while the Business Services team boosted revenue to $4.3bn from $4.0bn.

The Systems and Technology Group - the server and storage crowd - raised revenue to $5.1bn from $5bn last year. That's a humble 2 per cent increase. Sales of x86-based servers outpaced all other products, while the microelectronics and System i businesses struggled.

IBM was most proud of its high-margin software business, which increased revenue 13 per cent (9 per cent in CC) to $4.8bn. Middleware sales were very strong, rising 16 per cent to $3.7bn. Hooray for WebSphere.

Big Blue has stressed the software gains, since shipping code has proved a higher margin affair than shipping humans via services deals. IBM's services margins hover around 26.5 per cent, while software gross margins are way, way up at 84.5 per cent.

Overall, IBM's gross profit margin reached 41.8 per cent - a nice jump over last year's 41.2 per cent. IBM has upped gross margins in 12 consecutive quarters.

The margin increase did little to assuage analysts' concerns over IBM's rising costs. Total expenses and other income increased 11 per cent to $6.8bn. IBM said that acquisition costs, currency and its stock repurchase program all added to the expenses.

Shares of IBM rose more than 3 per cent during after-hours trading to $114.50, at the time of this report. ®

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