04:14 PM

IBM Reports Strong 2Q Earnings

IBM reported second-quarter net income that exceeded analysts' estimates, driven by strong results from its services and software businesses.

The company reported second-quarter net income of $2.4 billion, or $1.28 per share, compared with net income of $1.45 billion, or 75 cents per share, in the same period last year. This year's results included one-time items that boosted net income by about $700 million after taxes. Without those special items, IBM would have earned 91 cents per share in this year's second quarter, 3 cents per share above the mean analyst earnings estimate.

IBM's revenue rose to $21.9 billion in the second quarter, a 16% increase from $18.8 billion in the year-ago quarter. The computer giant's revenue from its hardware business rose 21.6% to $9.4 billion, although the gross profit margin in that business slipped to 28.6% from 30.7%. Revenue from global services rose 14.6% to $8 billion, while software revenue rose 9.1% to $3.13 billion.

"In addition to the strength in our services, software, and technology areas, we once again saw good growth in our System/390 servers, with shipments of System/390 computing power more than doubling year over year," says IBM chairman Lou Gerstner.

IBM says its RS/6000 business had a "marked improvement" during the second quarter, and that its PC business continued to grow. Growth in software revenue was driven by Universal Database, transaction processing, Lotus Notes, and Tivoli systems-management products.

By contrast, IBM's hard-disk drive and DRAM chip businesses faced serious pricing pressures during the quarter. For that reason, the company decided to shift development and manufacturing resources away from DRAM chips and toward higher-growth, higher-margin custom logic chips. Shifts in the company's DRAM business forced IBM to take charges totaling $874 million on an after-tax basis.

The need to reduce manufacturing expenses in its hard-disk drive business, including moving plants to countries with low labor costs, caused IBM to record an after-tax charge of $208 million. On the other hand, IBM recorded a $2.1 billion gain on the sale of Global Network, an Internet access business, in four countries.

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