Software, microelectronics drive IBM profit


A focus on higher-margin products and strong sales in middleware and microelectronics helped fuel IBM Corp. first quarter profit, the company said Tuesday.

Net income for the quarter was US$1.7 billion, up 21 percent from the year-earlier period. Per-share earnings were $1.08, which is up 27 percent over the year-ago quarter and beats expectations from analysts polled by Thomson Financial, who forecast the company to earn about $1.05 per share on $20.7 billion in revenue.

IBM reported revenue of $20.7 billion, down 10 percent from the year-earlier figure. Excluding first-quarter revenue from the company's PC business, which it sold in early 2005 to China's Lenovo Group Ltd., revenue was flat.

Revenue for IBM's Global Services business, which comprises more than half the company's overall revenue, was down 1 percent to $11.6 billion in the first quarter of 2006.

However, the unit's gross profit margin increased to 26.6 percent from 24.3 percent, and IBM signed services contracts worth $11.4 billion in the quarter, up from $10 billion for the year-earlier quarter, said Mark Loughridge, senior vice president and chief financial officer, on an earnings conference call with analysts and media following the report.

"We had really good momentum in short-term signings, and we think that will continue in the second quarter. Long-term signings as we exited 2005 were up 19 percent, and now long-term signings are up 20 percent. All of that bodes well for that business as we go forward," Loughridge said.

IBM has been ramping up its efforts to sell services along with hardware and software. In February the company said it's investing $1 billion over the next three years into information-management software and services and that it plans to grow the number of service consultants dedicated to this area from 15,000 to nearly 25,000.

Hardware revenue from the Systems and Technology Group was up 3 percent to $4.4 billion from the first quarter in 2005, driven by sales of microelectronics used in gaming platforms, System X servers, and storage, which offset lower sales of other servers.

"This was a very light hardware quarter for us," Loughridge said.

One factor contributing to lower server sales was the introduction of new products in February, which delayed first-quarter sales, Loughridge said.

Software revenue was up 2 percent to $3.9 billion year-over-year, driven by stronger middleware sales, spurred by customer interest in service-oriented architecture (SOA) deployments, Loughridge said.

IBM did not provide a second-quarter forecast but said the company is on track to meet analysts' expectations for the year. Analysts polled by Thomson Financial are forecasting $5.81 in earnings per share and $90.6 billion in revenue for the year.

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