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IBM sees earnings momentum

Big Blue reports higher second-quarter profit than a year ago, meeting Wall Street targets, but says it's still too early to predict an upturn in the tech market.

IBM on Wednesday reported higher second-quarter earnings that met analysts' expectations, but said that it's still too early to predict an upturn in the tech market.

The Armonk, N.Y.-based tech giant said its net earnings for the quarter were $1.7 billion, or 98 cents per share, for continuing operations. Revenue for the quarter, which ended on June 30, was $21.6 billion. During the same period a year ago, IBM reported earnings of $445 million, or 25 cents per share, on revenue of $19.7 billion.

Analysts expected the company to earn a profit of 98 cents a share on revenue of $21.4 billion, according to a survey by tracking firm First Call.

"Once again, IBM delivered a solid quarter despite the challenging economic environment. We continued our momentum from the first quarter and grew revenues and earnings per share and gained market share in our strategic businesses," IBM CEO Sam Palmisano said in a statement.

The second-quarter performance outdid that of a year ago, when IBM began regrouping and eliminating jobs in an effort to reinvigorate sales and profits.

Though the company did not give a detailed outlook for its third quarter, John Joyce, IBM's CFO, did offer a glimmer of optimism.

"In light of our performance through the first half, and the strength of this business model, we remain on track to meet the analysts' full-year average revenue and profit," he said during a conference call to discuss IBM's earnings statement.

IBM came out with a stream of new products and services during the third quarter of 2003. Many of the new offerings were tied to its on-demand computing strategy, which envisions a new breed of powerful computers and computer networks that are continuously available thanks to new kinds of software and self-healing capabilities.

Despite the lack of a services mega-deal, such as IBM's $2 billion technology outsourcing contract with auto-parts maker Visteon, IBM saw its Global Services revenues rise by 23 percent compared with last year, to $10.6 billion. The revenue increase was a smaller 14 percent when measured on a constant currency basis, that is, once IBM adjusted the figure to account for the differences in value between currencies.

IBM signed $10.7 billion worth of contracts during the quarter. The potential value of future global services contracts could be as high as $112 billion, the company said. Global services include outsourcing, IT consulting, maintenance and customer support.

"The pipeline is good. We think we will have a good quarter from a signings standpoint," Joyce said.

IBM's software revenue totaled $3.5 billion, a 6 percent increase, but a 2 percent increase when measured at constant currency. Software revenue got a boost from

IBM's hardware revenue for products such as servers and storage systems totaled $6.6 billion, a 1 percent decline from the same period last year, or a 6 percent decline measured at constant currency.

Revenue for servers and storage systems actually increased, but a dip in mainframe sales dragged down the division during the quarter.

The encryption software for IBM's newest Z990 mainframe, due later this quarter, should help boost mainframe system sales in the second half, Joyce said. Meanwhile, he said cutthroat price competition on server products and storage has slowed on a sequential basis, a good sign for IBM.

IBM's Personal Systems Group, which sells PCs, nearly broke even. But it was hurt by declines in prices, which offset increases in unit shipments, Joyce said.

Revenue for the group totaled $2.7 billion, a 3 percent year-over-year increase, or an 8 percent decrease at constant currency.

While revenue from systems, software and services were all basically positive, IBM's chip business showed continued weakness.

IBM's Technology Group, which consists mainly of its IBM Microelectronics division, posted revenue of $659 million, a 34 percent year-over-year drop, or a 35 percent decrease at constant currency.

The group posted a $111 million loss, Joyce said, due to lower than expected manufacturing yields, which drive up costs. Meanwhile, some customers delayed orders.

Joyce said the yields improved during the course of the quarter. IBM believes that the orders got pushed out because customers were nervous about the economy. The Technology Group's prospects should improve through an increase in chip orders if the economy improves, he said.

IBM did not mention its legal wrangling with the SCO Group, which filed a lawsuit against IBM earlier in the year.

But Joyce did say that IBM continues to cooperate with the U.S. Securities and Exchange Commission. The SEC is investigating how IBM Retail Store Solutions recognized revenue on certain transactions during 2000 and 2001.