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IBM beats 2Q forecasts

Big Blue hurdled estimates in the second quarter even as sales continued their recent slow trend.

After market close Wednesday, IBM (NYSE: IBM) reported second quarter net income of $1.9 billion, or $1.06 per share. First Call's survey of 23 analysts predicted a profit of $1 per share for the quarter ended June 30.

"Our second-quarter results are right in line with our expectations and with the view we've been expressing since last October," said Louis Gerstner, chairman and CEO.

Second quarter revenue of $21.7 billion was down 1 percent from $21.9 billion in the comparable period a year ago. Revenue was flat if currency fluctuations are discounted. Gross margin of 36.7 percent was down from 37.5 percent a year earlier.

Analysts have said IBM won't see stronger revenue growth until the second half of the year.

The company remains comfortable with analysts' full year earnings estimates, CFO John Joyce said, during a conference call with analysts. First Call currently predicts a profit of $4.36 per share for 2000. Joyce also said he "felt good about our momentum."

Joyce said the company could hit low double-digit sales growth in the second half. Third quarter sales should post decent sales growth with more of a pickup in the fourth quarter.

IBM Global Services boosted revenue 2 percent year-over-year to $8.2 billion. Excluding hardware maintenance contracts, revenue from the Global Network that was sold to AT&T (NYSE: T) last year, and Y2K-related business, services revenue increased 10 percent year-over-year.

The company's services backlog totaled $75 billion at the end of the second quarter.

"Mid-way through the second quarter, our services business re-ignited," Gerstner said. "New signings in the quarter totaled $20 billion -- a record quarter for IBM and what would have been a record year for many of our nearest competitors."

Hardware revenue fell 5 percent year-over-year to $9.2 billion. Price cuts in System/390 mainframes and a shift to newer products in the AS/400 server line caused sales to fall in those segments, IBM said. Personal computer sales also fell, partly because of component shortages, the company said.

Sales increased for Web servers, especially high-end and mid-range models. IBM Microelectronics saw "substantially" higher revenue, the company said, because of strong shipments of custom chips.

Revenue from storage declined because of continued product shifts in hard disk drives, IBM said.

Software revenue rose 2 percent year-over-year to $3.2 billion. Sales of middleware, especially Web management and databases software, saw strong growth. Operating system revenue fell because of the decline in AS/400 sales, as customers waited for newer models scheduled for release in the third quarter, the company said.

Global financing revenue rose 10 percent year-over-year to $819 million. Investments and other revenue fell 26 percent to $315 million.

"In a portfolio of our breadth and size, we often have units in transition," Gerstner said. "Our hard disk drive business, while improving quarter to quarter, is still a drag on our revenue growth. PCs, as well, improved quarter to quarter, but we're not satisfied with the results. Nevertheless, our outlook going forward is quite different from the one we faced in the last three quarters, and we continue to be very encouraged about the second half of this year."

On a geographic basis, the Asia-Pacific region led IBM with 20 percent year-over-year revenue growth to $4.3 billion. Revenue from the Americas fell 3 percent to $9.7 billion. Revenue from Europe, Africa and the Middle East dropped 9 percent to $5.9 billion.

Revenue from original equipment manufacturers fell 6 percent to $1.8 billion.

The company spent $1.8 billion on share buybacks during the second quarter.>