Hardware Sales Drive Q3 Growth For IBM

IBM's long-range strategy relies heavily on software and services. But in the company's third quarter it was sales of server and storage hardware that provided the most growth.

The 10 percent increase in hardware sales (11 percent adjusting for currency fluctuations) outpaced the tepid single-digit sales growth from the company's software and services operations.

IBM reported total revenue of $24.3 billion for the third quarter ended Sept. 30, up 3 percent from $23.6 billion in the third quarter of 2009. Net income reached $3.6 billion, up 12 percent from $3.2 billion one year earlier.

"Systems and Technology had its best growth in six years," said Mark Loughridge, IBM senior vice president and CFO, on a conference call with financial analysts Monday. Sales of Systems and Technology products, including mainframe, server and storage hardware, exceeded $4.3 billion dollars in the quarter compared to $3.9 billion in the same quarter last year.

Revenue from System x servers surged 30 percent in the quarter, IBM said, while sales of System z mainframes were up 15 percent. The latter got a boost early in the quarter when the company debuted its zEnterprise mainframe -- IBM's most powerful computer ever. Storage system sales grew 7 percent and revenue from microelectronics OEM deals increased 28 percent.

Next: Slow Growth In Software And Services

The only downside to the hardware numbers was a 13 percent drop, year-over-year, in sales of Power System servers. IBM recently unveiled new entry-level (Power 7 Express) and high-end (Power 795) additions to the product line, but they only began shipping near the end of the quarter. Loughridge said sales of mid-range Power System servers grew 11 percent during the quarter.

Sales of software products, excluding the PLM (product lifecycle management) software operation IBM sold earlier this year, were up 4 percent in the third quarter to $5.2 billion. But that growth was uneven. Sales of the company's WebSphere products jumped 14 percent, in contrast to sales of Lotus and Rational software, which were flat year-over-year. Information Management software revenue grew 5 percent while sales of Tivoli software increased 9 percent.

Loughridge said sales of business analytics (up 14 percent), storage management (up 20 percent) and security software were particularly strong in the quarter. "I do think we're going to see an acceleration in our software sales going into the fourth quarter," he said.

Global Services revenue increased only 2 percent in the quarter, pulled down by Global Technology Services, which reported growth of only 1 percent to $9.5 billion. Loughridge said a major GTS contract that IBM expected to sign in September was delayed until early this month. Global Business Services, however, grew 5 percent to $4.6 billion.

IBM also reported robust (16 percent) growth in sales in countries it has designated "emerging markets," and 29 percent growth specifically in Brazil, Russia, India and China.

Next: Earnings Forecast For The Year

For the nine months ended Sept. 30, IBM has recorded $70.9 billion in revenue, up 3 percent from $68.5 billion in the first nine months of 2009. Net income for the nine-month period reached $9.6 billion, up 11 percent from $8.6 billion in the first nine months of last year.

Loughridge said IBM now forecasts total earnings of $11.40 per share for all of 2010, up from $10.01 per share last year.