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IBM Posts Profits, Doesn’t Meet Expectations

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IBM announced first- quarter 2005 diluted earnings per common share of $.85 from continuing operations as reported…

…including the effect of expensing share-based compensation, compared with diluted earnings on a similar basis of $.79 per share in the first quarter of 2004, an increase of 8 percent. First- quarter income from continuing operations was $1.41 billion, including the adoption of expensing equity compensation, compared with $1.36 billion a year ago, an increase of 3 percent. Revenues from continuing operations for the first quarter were $22.9 billion, up 3 percent, compared with revenues of $22.2 billion for the first quarter of 2004.

Earlier this month, IBM announced its intention to expense equity compensation in the first quarter. The adoption is based on the implementation guidance provided in the SEC’s release of Staff Accounting Bulletin No. 107, and in accordance with the FASB’s revised Statement of Financial Accounting Standards (SFAS) No. 123, “Share- based Payments.”

Samuel J. Palmisano, IBM chairman and chief executive officer, said: “After a strong start, we had difficulty closing transactions in the final weeks of the quarter, especially in countries with soft economic conditions, as well as with short-term Global Services signings. As a result, we did not achieve all of our goals for the quarter. Middleware software and midrange systems results were solid, and we grew significantly in Business Performance Transformation Services and in the emerging markets of China, Brazil, India and Eastern Europe. We returned nearly $4 billion to investors in the quarter through share repurchases and dividends. We are taking appropriate measures to sharpen our execution, as we continue to implement our global growth strategies.”

First-quarter revenue growth of 3 percent (1 percent, adjusting for currency) was driven by growth in the Americas and Europe/Middle East/Africa. In the Americas, first-quarter revenues from continuing operations were $9.3 billion, up 2 percent (1 percent, adjusting for currency) from the 2004 period. Revenues from Europe/Middle East/Africa were $7.7 billion, an increase of 7 percent (2 percent, adjusting for currency). Asia-Pacific revenues grew 1 percent (down 2 percent, adjusting for currency) to $5.2 billion. OEM revenues increased 3 percent to $691 million compared with the first quarter of 2004.

Revenues grew in four of IBM’s five industry sectors in the first quarter led by the Distribution sector, as well as growth in sales to Small and Medium Businesses.

Revenues from Global Services, including maintenance, increased 6 percent (3 percent, adjusting for currency) to $11.7 billion in the first quarter. Global Services revenues, excluding maintenance, increased 7 percent (4 percent, adjusting for currency). IBM signed services contracts totaling $10.0 billion and ended the quarter with an estimated services backlog, including Strategic Outsourcing, Business Consulting Services, Integrated Technology Services and Maintenance, of $110 billion.

In addition to these signings and backlog figures there were about $200 million of Engineering and Technology Services signings to provide Business Performance Transformation Services customers with design skill and technical capabilities.

Hardware revenues from continuing operations were essentially flat (down 2 percent, adjusting for currency) to $6.7 billion in the first quarter versus the first quarter of 2004. Revenues from the Systems and Technology Group totaled $3.9 billion for the quarter, up 2 percent on eServer revenue increases. This includes a 12 percent increase in pSeries UNIX servers, which is expected to gain market share in the first quarter, and an 8 percent increase in xSeries servers. Revenues from the zSeries mainframe product decreased 16 percent compared with the prior-year quarter. The total delivery of zSeries computing power as measured in MIPS (millions of instructions per second) decreased 11 percent. Revenues for the iSeries midrange servers increased 1 percent. Storage Systems and Technology OEM increased 5 percent and 2 percent, respectively. Revenues from Personal Systems Group decreased 3 percent to $2.7 billion. In the fourth-quarter 2004, IBM announced an agreement to sell the Personal Computing Division, a unit of the Personal Systems Group, which is expected to close in the second-quarter 2005.

Revenues from Software were $3.6 billion, an increase of 2 percent (flat, adjusting for currency) compared with the first quarter of 2004. Revenues from IBM’s middleware brands, which include WebSphere, DB2, Rational, Tivoli and Lotus products, were $2.8 billion, up 3 percent versus the first quarter of 2004. Operating systems revenues decreased 2 percent to $590 million compared with the first quarter of 2004.

Revenues for WebSphere family of software products, which facilitates customers’ ability to manage a wide variety of business processes using open standards to interconnect applications, data and operating systems, increased 11 percent. Revenues for Information Management increased 5 percent including revenues for DB2 database software, which enables clients to leverage information on demand, increased 9 percent. Revenues from Tivoli software (infrastructure software that enables customers to centrally manage networks and storage) increased 15 percent, and revenues for Lotus software, which allows collaborating and messaging by customers in real-time communication and knowledge management, increased 11 percent. Revenues from Rational software (integrated development tools) were flat compared with the first quarter of 2004.

As a result, IBM expects to gain or hold market share for the first quarter in the collaborative software, systems management and security software, Web services and data management categories.

Global Financing revenues declined 12 percent (15 percent, adjusting for currency) in the first quarter to $580 million. Revenues from the Enterprise Investments/Other area, which includes industry- specific IT solutions such as product life-cycle management software, increased 15 percent (12 percent, adjusting for currency) to $332 million compared with the first quarter of 2004.

The company’s total gross profit margin from continuing operations was 36.0 percent in the 2005 first quarter, which includes the effect of expensing equity compensation, compared with 35.6 percent in the first quarter of 2004 on a similar basis.

In the first quarter of 2005, total expense and other income from continuing operations increased 5 percent to $6.2 billion and, coupled with the revenue increase of 3 percent, IBM’s total expense-to-revenue ratio increased 0.5 points to 27.3 percent. For the quarter, the reporting periods reflect the adoption of expensing equity compensation as it relates to both selling, general and administrative (SG&A) expense and research, development and engineering (RD&E) expense. SG&A expense increased 6 percent to $4.9 billion. RD&E expense increased 3 percent to $1.5 billion. Intellectual property and custom development income increased to $219 million compared with $180 million a year ago. Other (income) and expense was $22 million of net expense in the first quarter of 2005 versus $13 million in the same period last year.

IBM’s effective tax rate from continuing operations in the first quarter 2005 was 30.0 percent, compared with 30.1 percent in the first quarter of 2004.

Share repurchases totaled approximately $3.4 billion in the first quarter. The weighted-average number of diluted common shares outstanding in the first-quarter 2005 was 1.66 billion compared with 1.73 billion shares in the same period of 2004. As of March 31, 2005, there were 1.61 billion basic common shares outstanding.

IBM ended the first quarter of 2005 with $8.7 billion of cash on hand. The balance sheet remains strong, and the company is well positioned to take advantage of opportunities.

Debt, including Global Financing, totaled $23.4 billion, compared with $22.9 billion at year-end 2004. From a management segment view, the non-global financing debt-to-capitalization ratio was 5.3 percent at the end of March 31, 2005, and Global Financing debt declined $413 million from year-end 2004 to a total of $21.9 billion, resulting in a debt-to-equity ratio of 6.7 to 1.

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IBM Posts Profits, Doesn’t Meet Expectations
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