IBM Second-Quarter Sales Flat, But Profits Jump

The company's biggest challenge is finding a way to kick-start its services business, which accounts for about one-half of its total sales.

IBM on Tuesday posted mixed results for its second quarter, reporting a 10% jump in net income as sales slumped 1.8%.

The company, which in recent months has been investing heavily in India in part to reduce operating costs, reported net income for the three months ended June 30 of $2.02 billion. Sales for the period slipped to $21.9 billion. Discounting sales from its now-divested PC business, IBM's second quarter revenue increased 1% year-over-year.

The company also reported a 14.9% jump in per-share earnings, to $1.31. Analysts surveyed by Thomson First Call, on average, were expecting earnings per share of $1.29.

IBM's biggest problem appears to be finding a way to kick start its growth-challenged services business, which accounts for about one half of its total sales. Its Global Services arm posted second quarter revenue of $8.4 billion, the latest in a string of no- or low-growth quarters. However, its services margins are improving as the company shifts more of the work to low-wage India. Gross margin for services was 27.7% in the second quarter, compared to 26.1% a year ago.

A bright spot for IBM was its software business, which saw revenues in the quarter increase 5.6% to $4.78 billion. Middleware sales, which include the Websphere, Tivoli, Lotus, and Rational product lines, rose 4%. On the hardware side, server group sales rose 3.5% to $5.28 billion, with zSeries mainframe-related revenue up 7%. Sales of Unix-based pSeries systems were off 10%.

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