Hardware revenues took a one billion dollar dive during IBM’s second quarter, while services revenues enjoyed a one billion dollar lift, prompting CEO Lou Gerstner to refer to the quarter as mixed. Net profits were up a fractional 0.4% at $1.45bn while total revenues languished, down 0.3% at $18.82bn. And while earnings per share were up by 5% to $1.50, handily beating the consensus of analysts estimates, this was purely a product of the $1.7bn spent by IBM on repurchasing its own shares. The average number of shares in issue declined by 5% year on year, added to which, the net profit figure also includes a $100m lift from the reduction in IBM’s rate of corporation tax. Hardware revenues, the biggest problem area, were worst hit in the PC sector, said Gerstner, where pricing pressures and excess inventory took a severe toll on profits. But System/390 server sales also slowed in the quarter, blamed on product transition. Overall, hardware revenues shrank 13% to $7.5bn with gross margins declining 5% to 30.3%. But services, IBM’s second biggest business unit after hardware, saw a 22% rise in revenues to $5.6bn with improving margins. This performance was on the high side of market expectations, even though Gerstner has predicted these 20% plus growth rates for his star division throughout this year. But elsewhere, software revenues grew by just 4.6% to $3.2bn while maintenance declined 9.3% to $1.48bn. Such mixed results, said Gerstner, were evidence of, the value and strength of IBM’s portfolio of businesses. In other words, while hardware revenues showed an alarming decline, investors can take heart in the phenomenal growth generated by the services business. Gerstner predicted that the worst performing areas would begin to see some improvement over the remainder of the year, although he was still cautious about Asia, which saw revenues decline by $500m year on year to $3.3bn, but which still accounts for 18% of IBM’s business. Without the gargantuan share repurchase scheme, combined with the significant reduction in the tax rate in the quarter, IBM’s net earnings would have appeared significantly worse. And even before such effects, the group gross margin declined by 1.4% over the last six months.
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