IBM Q1 Sales, Earnings Defy Weakening Economy

But most of the company's growth in the quarter ended March 31 came from software products and services. Revenue generated by IBM's Systems and Technology Group fell 7 percent, led by plunging sales of System i servers and flat sales of System x servers.

"Despite economic concerns we continue to sell into our existing accounts where we can provide cost savings and a faster return on investment for our clients," said Mark Loughridge, IBM senior vice president and CFO, in a call with Wall Street analysts. The executive said demand remains high for solutions that address such customer needs as risk management, security and energy efficiency.

Some of the company's results ran counter to what might be expected in the current economic downturn that many believe has already become a recession. While sales in fast-growing emerging markets increased 11 percent year-over-year, sales in the Americas also grew by 8 percent to $9.9 billion. And while the financial services industry has been hard hit by the collapse of the subprime mortgage market, IBM sales to financial services companies increased 14 percent in the quarter to $6.9 billion.

Revenue generated by IBM's Global Technology Services increased 17 percent to $9.7 billion while Global Business Services sales also grew 17 percent to $4.9 billion. "The services market has shifted to one which favors solutions that deliver shorter time-to-value," Loughridge said. "Clients are focused on a faster payback driven by proven value propositions. And there is no shortage of opportunities for deals that fit those characteristics."

Sales of IBM software increased 14 percent in the quarter to $4.8 billion with double-digit sales growth for the company's WebSphere, Lotus and information management products -- the last including Cognos business intelligence software that IBM acquired in January for $5 billion.

But a report from Wedbush Morgan Securities analyst Michael Nemeroff noted that software sales may have actually declined in the quarter after subtracting the contribution from Cognos, which he estimated at $250 million to $300 million. He said the quarter was also a tough one for perpetual license software sales.

The 7 percent drop in sales of systems and technology products (2 percent excluding the Printing System Division IBM sold last June) reduced that group's revenue to $4.2 billion. Sales of legacy System i servers fell 21 percent and Loughridge said flat sales of System x servers and continued weakness in OEM sales were "disappointing." (While sales of Windows and Linux servers at the high end of the System x line grew at a healthy pace, Loughridge said sales of low-end servers took a hit because of the ailing economy. OEM revenue decreased 16 percent to $696 million).

Bright spots in Systems and Technology were sales of System z mainframes and data storage systems, both of which increased 10 percent in the quarter. Sales of converged System p servers grew 2 percent.