IBM slows in second quarter

IBM Corp. reported a drop in revenue Wednesday for its second fiscal quarter compared to 2001, as it suffered from a weak overall economy and large reorganizations within its business units.

IBM, based in Armonk, New York, posted US$20 billion in second-quarter revenue, a 7 percent decrease from the same quarter in 2001. The company generated $56 million in net income compared with $2 billion in net income in last year's second quarter, including charges, the company said in a statement.

Diluted earnings per share for IBM came in at $0.03, including costs associated with workforce reductions, a realigning of its microelectronics division and the agreement to sell its hard disk drive business to Hitachi Ltd. Excluding these charges, IBM posted $0.84 earnings per share, it said in the statement. IBM posted earnings per share of $1.15 in the same quarter last year.

The consensus estimate for IBM by analysts polled at Thomson Financial/First Call was for $0.83 earnings per share, excluding charges, but including IBM's hard disk drive business.

The company cited growth in its middleware software business as a high point in the quarter. In addition, IBM claimed to hold even with the competition in its server and storage businesses.

Excluding IBM's hard disk drive business, the company posted revenue of $19.7 billion for the quarter ended June 30. IBM marked the hard disk drive business as a discontinued operation in its earnings statement and said that segment showed a loss of $389 million or $0.22 per diluted share for the quarter.

IBM's earnings have been under scrutiny by the analyst community after it sold its hard disk drive unit to Hitachi in June. IBM had lost $515 million over the last five quarters from poor hard disk drive sales and will take charges in coming quarters as part of the deal. Still, the company did not alter its per share earnings targets for coming quarters following these announcements.

.Like other sever and storage vendors, IBM has suffered from slow hardware sales. In the quarter just ended its server and storage revenue declined 17 percent year-on-year. Sales of its pSeries Unix servers were particularly weak, with revenue dropping 27 percent. Its storage business also performed poorly, shedding 23 percent of revenue compared to last year's second quarter, IBM said.

IBM's software business grew 7 percent, bolstered by 10 percent growth from its middleware products, which include its WebSphere application server.

Revenue from IBM's oft celebrated services business was down 1 percent to 2 percent in the quarter, said John Joyce, IBM senior vice president and chief financial officer, during a conference call with press and analysts to discuss the results.

"In general, customer demand was similar to what we saw in the first quarter," Joyce said. "Europe seemed to have weakened a little bit, but the U.S. seemed to show a little progress."

Joyce said small and medium-sized customers made more purchases in the second quarter than in the first.

He said he expected to see "modest revenue growth" for IBM in the second half of the year.

Shares of IBM closed up more than 2 percent to $70.69 ahead of the earnings announcement.

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Ashlee Vance

Computerworld
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