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IBM's First-Quarter Sales Rise On Renewed IT Spending

Mainframes and WebSphere lead the way, while microelectronics business was the laggard.
IBM reported a 16% increase in first-quarter profits Thursday, as double-digit gains in hardware and software sales combined with favorable foreign-exchange rates to push ahead revenue. IBM's chief financial officer said customers are buying again, having worked off excess technology capacity from the '90s.

IBM earned $1.6 billion during the quarter ended March 31, compared with earnings of $1.4 billion during the same period last year. Revenue rose 11% to $22.2 billion. CFO John Joyce called analysts' 2004 estimates of $23.3 billion in revenue and earnings of $1.11 per share "reasonable."

Market-share gains came at the expense of Hewlett-Packard and Sun Microsystems, Joyce claimed, adding customers are spending more on IT after a period of lighter investment. "Their infrastructures are just getting old," he said during a conference call with analysts.

Mainframes and WebSphere software led the way. Hardware sales increased 16% during the quarter to $6.7 billion, with delivery of zSeries mainframe computing power doubling compared with the first quarter of 2003. Sales of the company's back-office WebSphere software jumped 24%, while overall software sales climbed nearly 11%, to $3.5 billion.

Revenue from IBM's services and consulting business rose more than 9%, to $11 billion. The company signed more than $10 billion in services contracts during the quarter. IBM also acquired two software companies: Candle Corp. and Trigo Technologies.

IBM's microelectronics business, however, continued to struggle. The unit, recently combined with IBM's systems business, would have lost $150 million on a standalone basis, according to Joyce. IBM expects the former technology group to turn a profit this year, but to do that, the company needs to increase semiconductor yields--the percentage of usable chips manufactured in a run.

As a result, the company boosted research and development spending by 14.4% in the quarter, to $1.37 billion. The increase was also associated with new product development, and won't be as sharp in the future, he added.

Shares of IBM closed Thursday up 27 cents at $93.97.

Separately, IBM said on Thursday that it signed a $300 million contract to manage Philips Consumer Electronics' North American customer-service activities.