Want CNET to notify you of price drops and the latest stories?

IBM nips estimates despite charges

The computing behemoth squeaks by analysts' expectations for its second quarter, coming out ahead by a penny before a massive charge associated with layoffs and restructuring.

John G. Spooner Staff Writer, CNET News.com
John Spooner
covers the PC market, chips and automotive technology.
John G. Spooner
4 min read
IBM squeaked by analysts' expectations for its second quarter, beating estimates by a penny before a massive charge associated with layoffs and restructuring.

The computing behemoth reported an actual profit of just $56 million, or 3 cents per share, after charges for the quarter, which ended June 30. Revenue for the three-month period came in at $19.7 billion. The figure reaches $20.3 billion when including revenues from discontinued operations. But excluding a charge of 81 cents per share for costs associated with the company's exit of the hard-drive business, layoffs and other divestitures, IBM turned a profit of 84 cents per share for the quarter, beating expectations.

Analysts expected the company to report a profit of 83 cents per share on revenue of $19.4 billion for the second quarter, according to FirstCall.

Last year, IBM posted a profit of $2 billion, or $1.15 per share, in the second quarter. This year's $19.7 billion in second-quarter revenue ($20 billion including $379 million in revenue from the hard-drive business) was also down from the $20.8 billion recorded in the same period a year ago.

The highlight for IBM's second quarter was software. While revenue for services stayed basically flat, declining by 1 percent, and revenue for hardware declined by 16 percent, software jumped 8 percent.

"Our software business achieved solid growth, gaining share across the middleware portfolio. We recorded our ninth consecutive quarter of new services signings of $10 billion or more. Also, we held overall share in server and storage systems in the face of pricing and demand pressures," Sam Palmisano, IBM's chief executive officer, said in a statement.

IBM's outlook is now more upbeat. IBM CFO John Joyce said he now believes that, thanks to IBM's cost cutting operations, the company can breathe more easily.

IBM is less reliant on cyclical businesses such as semiconductors, and more focused on profitable areas such as software and services, he said.

"We feel that the downside in IT demand is roughly offset by the benefits of the actions we have taken," Joyce said.

However, additional charges resulting from a deal to spin off its hard drive business could cut into future profits. Joyce said the total charges from its divestitures and layoffs will be between $2.5 billion and $3 billion, up from its earlier estimate of $2 billion to $2.5 billion.

Much of the charges come from hard drives. IBM sold its hard drive division to Hitachi, which will create a new company to produce drives.

Hitachi will own 70 percent of the new company, which will include IBM's hard drive technology and the transfer of employees who work in IBM Storage, but Joyce said the company is being choosy with regards to which assets it takes on in the deal. IBM will receive $2.05 billion for the business, which the company says lost $515 million in the past five quarters.

IBM now feels that analysts consensus of a $4 per share profit for the year is accurate, excluding charges, Joyce said. However, he declined to speculate on IBM's revenues for the year.

This all comes after another tough quarter for IBM. The company struggled with declining hardware revenues due to the soft market for information technology. Hardware revenues declined by 16 percent, year-over-year, to $6.7 billion, while services revenues stayed basically flat, declining by 1 percent, year-over-year, to $8.7 billion. The services slowdown was the result of a decline in consulting and systems integration business, the company said.

IBM's cost cutting program, initiated after a serious first-quarter sales slowdown, has now touched nearly all of the company's business segments.

Beginning in May, IBM has moved through a series of job cuts and divestitures--the largest of which is its hard drive business--to reduced its work force by about 27,400, company observers estimate.

The company cut about 7,000 positions in its Technology Group, Global Services, server, software and research divisions. Meanwhile, about 2,400 other employees have been transferred out of the company in business deals involving its Endicott, N.Y., manufacturing facility and a human resources outsourcing deal with Fidelity, according to Alliance@IBM. The Alliance@IBM is a group attempting to create a union for IBM employees.

Meanwhile, roughly 18,000 employees working in IBM's Storage Group will become employees of the new hard drive joint venture with Hitachi. That deal is expected to close by the end of the year.

IBM has divested a number of smaller technologies and facilities. It will sell its Endicott, N.Y., manufacturing facility and transfer about 2,000 employees who work there to a group of investors.

IBM started the year with 319,000 employees worldwide.

Going forward, IBM believes success will mean signing on new services customers in areas such as technology outsourcing, as well as gaining customers in servers using products other companies can't match.

IBM saw strong demand for its xSeries servers, its eight-way servers based on Intel's Xeon MP chip, Joyce said. The machine includes self-management and self-healing features developed by IBM researchers.

Now all IBM needs is time, during which it hopes the economy will improve.

"We've taken the necessary steps to streamline our company," Joyce said. "We've never had a more competitive set of products and offerings."