John Joyce, IBM’s chief financial officer, said in a conference call with Wall Street analysts yesterday after the market closed that pretax profits in the quarter were up 16% to $2.3bn, but he admitted that profits were under pressure because intellectual property sales were down, pension and healthcare costs went up, and workforce reductions ate up money. IBM’s intellectual property sales only amounted to $180m (down $102m from Q1 2003). The company had to kick in $187m more for healthcare and pension costs compared to a year ago. And workforce rebalancing, which is IBMese for layoffs, cost $163m, up $85m from this time last year. After taxes, IBM had net income of $1.6bn, up 16%, and earnings of $0.95 a share, up 18.8%. (Those stock buy-backs are still helping Big Blue pull off the EPS growth.)
IBM’s juggernaut Global Services unit accounted for $11.1bn in sales, up 9% as reported and 1% at constant currency. Joyce said that the company had booked $10.5bn in new services contracts in the first quarter and had increased its services backlog to approximately $120bn. Strategic outsourcing, which accounts for about 40% of Global Services’ sales, was the revenue driver for the quarter, with sales up 16%. IBM’s integrated technology services (about 30% of sales and comprised of continuity and recovery services as well as software and hardware maintenance) increased by 6%, while business consulting services (about 30% of sales) was up only 4% in the quarter.
IBM’s hardware business did well in the first quarter, for a change. Lumping all hardware together, IBM sold $6.7bn in gear, up 16% as reported and up 10% at constant currency. Companies and consumers in every geography are buying computers. Customers have worked off the excess capacity of the late 1990s and are buying again, explained Joyce. Customers’ infrastructures are getting old, and they need to upgrade. He added that so much of that old iron has been depreciated that it is effectively off the books, which means companies can better afford to put new capital expenditures on the books.
IBM recently merged its Systems Group and its Technology Group into a single Systems & Technology Group, and that group accounted for $3.8bn of hardware sales, up 14%. Joyce said that overall server sales were up by 19% in the quarter. Sales of the zSeries mainframe line were up 34%, with nearly 100% MIPS growth. New workloads, Linux partitions, and growth of existing mainframe applications were the three drivers behind this big bump in mainframe sales. He said that IBM had stopped being aggressive in the early part of 2003 with mainframe prices, and it slowed sales, and in the first quarter IBM cut prices more aggressively and it boosted sales while not adversely impacting margins.
Sales of pSeries Unix servers were up 15%, with decent sales in the entry and high-end market. He said that pricing for Unix kit was no more or less aggressive than in the fourth quarter, and that IBM had to fight hard to compete against Hewlett-Packard Co and Sun Microsystems Inc to win Unix sales. He said that when IDC put out its first quarter market share analysis, it would show that IBM had market share gains for the seventh quarter in a row. On the related Power-based iSeries server front, sales were down 7% as customers are anticipating new machines. Joyce confirmed that the new Power5-based iSeries line would launch soon, and would start shipping by the end of the second quarter. Sales of X86-based xSeries servers, which include a huge number of Intel Pentium 4 and Xeon machines and a smattering of Intel Itanium and AMD Opteron machines, were up 28% in the quarter. Storage revenues were up 16% in the aggregate, with midrange disk arrays and tapes doing well. (Disk arrays were up 11%, while tape products were up 25%.) IBM’s Personal Systems unit booked $2.8bn in sales, up 18% thanks to increasing demand for laptops and notebooks, which carry premiums compared to desktops.
On the software front, sales were up 11% as reported to $3.5bn, but at constant currency, this is only 3% growth. Sales of Rational development tools increased by 88%, and WebSphere-branded sales were up 25% (with the WebSphere Application Server up 33%, and probably driven in large measure by booming mainframe sales). Domino and related middleware products were up 15% compared to the first quarter of 2003, and Tivoli showed better signs with 18% growth against a weak compare. Perhaps most significantly, gross profit margins in the Software Group were 86%, up 1.4% compared to last year.
This article is based on material originally published by ComputerWire
