IBM Reaffirms Full Year Estimates

IBM Senior Vice President and Chief Financial Officer Mark Loughridge said IBM was hit by the same deferrals in software spending in the quarter that have resulted in earnings and sales warnings from software competitors such as PeopleSoft, Computer Associates, and Veritas. The earnings warnings have sparked fears among some investors that IT spending may be slower in the second half of the year.

Loughridge, however, said that IBM continues to expect IT spending growth in 2004 of 4 percent to 5 percent, the best year in IT spending growth since 2000.

"We faced some of same issues highlighted by competitors," said Loughridge. "But unlike pure play competitors, we overcame this with the strength of the IBM business model."

For its second quarter ended June 30, IBM posted an 18 percent increase in earnings to $1.99 billion or $1.16 per share on a 7 percent increase in sales to $23.2 billion.

The $1.16 earnings were above the Wall Street consensus of $1.12, according to analysts surveyed by Thomson/First Call. The revenue of $23.2 billion was just below the $23.35 billion, according to Thomson/First Call.

For the full year, analysts are expecting earnings of $4.95 per diluted share on sales of $96.3 billion. That compares with diluted earnings per share of $4.34 on sales of $89.3 billion in 2003.

IBM software sales in the second quarter were $3.5 billion, essentially flat compared with the year ago quarter (down four percent when adjusting for currency). Sales from IBM's middleware products, which include WebSphere, DB2, Rational, Tivoli and Lotus products, on distributed platforms were down three percent, said Loughridge.

Admitting the "overall disappointing software performance," Loughridge said IBM remained confident that a number of the big software deals will close in the third quarter. He said IBM anticipates modest growth in quarterly and year to year software numbers.

"The number of large deals was down and as a result our average deal size declined," said Loughridge, noting there was a longer sales cycle on deals. That said, Loughridge said, the majority of the deferred deals "still represent good opportunity for us."

Among the areas where IBM saw solid growth were IBM Global Services' strategic outsourcing business and X Series servers, where IBM's strong blade server lineup is capturing IBM customers in the Intel server segment that are for the first time looking to buy IBM servers, said Loughridge.

Revenues from IBM Global Services, including maintenance, increased 7 percent (2 percent, adjusting for currency) to $11.3 billion in the quarter. IBM signed more than $10 billion in new IGS business during the quarter. Strategic outsourcing, which represents overall about 40 percent of IGS sales, was up 12 percent. E-Business hosting, which includes Web hosting and application management, was up 27 percent. Intel based X-Series sales was up 18 percent year over year driven by IBM's blade servers. "We are expanding our customer base with some customers who are going to IBM for Intel solutions for the first time," said Loughridge.

One emerging area where IBM plans to invest heavily going forward, said Loughridge, is in the Business Process Transformation Services (BPTS) segment where customers are looking to IBM to help them reduce SG &A spending by redesigning business processes.

IBM's BPTS sales are up 40 percent in the first half of the year, said Loughridge. He said IBM believes the BPTS services opportunity is exploding because of the acceptance of standards and the ubiquity and reliability of the Internet.