IBM remains relatively unscathed in the struggling economy, reporting that sales in the third quarter ended Sept. 30 grew 5 percent to $25.3 billion while earnings increased 20 percent to $2.8 billion. But server hardware sales continue to decline, becoming an increasingly smaller part of the company's overall business.
The earnings were in line with preliminary financial results IBM issued last week.
"This is a tough environment, but we were ready for it," said Mark Loughridge, senior vice president and CFO, in a conference call Thursday. He attributed IBM's Q3 results to the company's efforts to expand sales in emerging markets like China and India while cutting costs and increasing productivity in operations in mature markets.
Services and software remain IBM's growth engines. Global Technology Services revenue in the third quarter increased 8 percent from the same period one year earlier to $9.9 billion, with particularly strong growth reported in Integrated Technology Services. Global Business Services revenue grew 7 percent to $4.9 billion.
Software sales grew 12 percent to $5.2 billion in the quarter, fueled by big increases in sales of Rational development products (up 23 percent) and information management software (up 26 percent). The latter got a boost from sales of business intelligence software from Cognos, which IBM acquired in January, and database software. Sales of Lotus applications were up 10 percent while sales of WebSphere and Tivoli software grew 4 percent and 2 percent, respectively.
Hardware sales from IBM's Systems and Technology unit dropped 10 percent to $4.4 billion, however. While that continues a long-running trend, the size of the decline was apparently more than IBM anticipated. "Hardware was below our objectives," Loughridge acknowledged.
Sales of the company's System z mainframes surged 25 percent and sales of the converged System p server line grew 7 percent. But System x server sales decreased 18 percent and legacy System i server sales plunged 82 percent. The CFO said the slow System x sales resulted from "sales execution issues" and other factors and he expected sales of that product line to rebound.
System storage sales decreased 3 percent and revenue from OEM microelectronics dropped 27 percent.
Geographically, IBM reported only 3 percent sales growth in the Americas, while sales increased 10 percent in Europe/Middle East/Africa and 6 percent in Asia/Pacific. Sales to small and midsize businesses, which are often harder hit in economic downturns, increased 5 percent during the quarter.
Despite the turmoil and consolidation racking the financial services industry, IBM reported 7 percent sales growth in that market. Loughridge said financial services accounts for just 1 percent of IBM's sales.
IBM has $10 billion in cash and another $10 billion in "credit facility backstop" financing. Loughridge said that means IBM is not dependent on short-term "commercial paper" markets to fund ongoing business operations.