IBM Reports 2003 Second-Quarter Results



ARMONK, N.Y.--(BUSINESS WIRE)--July 16, 2003--IBM (NYSE: IBM):

-- Diluted earnings per share of $.98 from continuing operations increased 292 percent in the second quarter, or 10 percent excluding year-ago period charges;
-- Income from continuing operations of $1.7 billion grew 288 percent year over year, or 11 percent excluding the charges;
-- Second-quarter revenues from continuing operations of $21.6 billion, up 10 percent

IBM today announced second- quarter 2003 diluted earnings per common share of $.98 from continuing operations compared with diluted earnings per common share of $.25 in the prior-year period, an increase of 292 percent. Diluted earnings per share grew 10 percent year over year after excluding incremental charges of $1.1 billion after tax, or $.64 from the year-ago period for 2002 actions. Income from continuing operations for the second- quarter 2003 was $1.7 billion compared with $445 million in the second quarter of 2002, an increase of 288 percent. Second-quarter 2003 income from continuing operations grew 11 percent excluding the charges from the prior-year period for 2002 actions. Revenues from continuing operations for the second quarter were $21.6 billion, up 10 percent (3 percent at constant currency) compared with the second quarter of 2002 revenues of $19.7 billion.

Samuel J. Palmisano, IBM chairman and chief executive officer, said: "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. Further, we are benefiting from our acquisitions, as well as the restructuring actions we took last year. Most importantly, we are encouraged by the acceptance of our e-business on demand strategy as more customers realize the productivity gains associated with becoming an on demand business.

"IBM Global Services delivered strong double-digit revenue growth reinforcing our leadership position in IT services. We are also very pleased with our continued momentum in the small and medium-sized businesses, strengthened by a new line of 'Express' solutions aimed squarely at the needs of this fast growing customer base. In addition, IBM eServers also generated strong growth, particularly in our xSeries systems and UNIX-based IBM pSeries.

"Finally, we believe the industry will continue to evolve where business process insight combined with technology leadership will be what customers want to ensure the success of their companies. And while it is difficult to predict the certainty of an economic rebound, IBM is in the best position to benefit further from any upturn in the market or the economy overall."

In the Americas, second-quarter revenues from continuing operations were $9.5 billion, an increase of 5 percent (5 percent at constant currency) from the 2002 period. Revenues from Europe/Middle East/Africa were $6.9 billion, up 23 percent (3 percent at constant currency). Asia-Pacific revenues improved 12 percent (6 percent at constant currency) to $4.6 billion. OEM revenues across all geographies decreased 30 percent (31 percent at constant currency) to $588 million compared with the second quarter of 2002.

Revenues from Global Services, including maintenance, increased 23 percent (14 percent at constant currency) in the second quarter to $10.6 billion aided by the addition of the former PwC Consulting business. Global Services revenues, excluding maintenance, increased 25 percent (17 percent at constant currency). IBM signed $10.7 billion in services contracts in the quarter and ended the quarter with an estimated backlog of $112 billion.

Total hardware revenues from continuing operations decreased 1 percent (6 percent at constant currency) to $6.6 billion from the 2002 second quarter. Systems Group revenues, which include IBM eServers and storage systems products, were $3.2 billion, up 10 percent (3 percent at constant currency). In eServers, xSeries Intel processor- based servers and pSeries UNIX-based servers grew revenues. Revenues from iSeries midrange servers increased (down at constant currency). Revenues from zSeries mainframe servers declined as MIPS (millions of instructions per second) -- a measure of total delivery of mainframe computing power -- declined 7 percent versus the year-ago period. Notably, in May, the new on demand enterprise mainframe, z990, was introduced. Storage systems revenues were up largely as a result of demand for disk storage, particularly high-end Shark and midrange FAStT products.

Also in the second-quarter 2003, Personal Systems Group revenues declined 3 percent (8 percent at constant currency) to $2.7 billion primarily from lower revenues for personal computers. Technology Group revenues were $659 million, down 34 percent (35 percent at constant currency) partly for actions taken in 2002 including the divestiture of multiple non-core businesses, to refocus and direct the Microelectronics Division to high-end foundry, ASICs and standard products, while building a technology services business.

Revenues from Software increased 6 percent (down 2 percent at constant currency) to $3.5 billion compared with the prior year's second quarter. Middleware brands, which include WebSphere and DB2 product families, grew revenues 7 percent (down 1 percent at constant currency) to $2.7 billion in the second quarter of 2003. Operating systems revenues increased 5 percent (down 2 percent at constant currency) to $589 million compared with the year-ago period. The post- acquisition results of operations for Rational, acquired in the first- quarter 2003, are included in the software segment results.

WebSphere, IBM's family of e-business on demand middleware products, grew revenues 14 percent (6 percent at constant currency) from a year ago. IBM's leading database management software, DB2, improved revenues 16 percent (7 percent at constant currency). Revenues from Tivoli increased 9 percent (flat at constant currency) and Lotus revenues declined 3 percent (12 percent at constant currency).

Global Financing revenues decreased 18 percent (24 percent at constant currency) in the second quarter to $672 million. Revenues from the Enterprise Investments/Other area, which includes industry- specific IT solutions, increased 6 percent (down 1 percent at constant currency) compared to the second quarter of 2002 to $240 million.

The company's total gross profit margin from continuing operations was 37.0 percent in the 2003 second quarter, unchanged from the same period in 2002.

In the second quarter of 2003, total expense and other income from continuing operations was $5.5 billion, compared with $6.7 billion in the year-ago period which included incremental pre-tax charges of $1.6 billion associated with the realignment of the Microelectronics Division and productivity actions in the second-quarter 2002.

In the quarter, selling, general and administrative expense was $4.5 billion including expense associated with the recent acquisitions of the former PwC Consulting and Rational, compared with year-ago expense of $5.3 billion which included pre-tax charges of $1.1 billion for second-quarter 2002 actions. Research, development and engineering expense increased 2 percent largely due to acquisitions. Intellectual property and custom development income declined 18 percent, and, despite higher foreign exchange losses on hedging contracts, other (income) and expense had a lower negative impact versus the year-ago quarter that included the 2002 actions as well.

IBM's tax rate from continuing operations in the second quarter was 30.0 percent compared with 25.3 percent in the second quarter of 2002. The prior-year rate was lower due to the tax effect of the second- quarter actions.

For total operations, net income for the second-quarter 2003, including discontinued operations, was $1.7 billion, or $.97 per diluted common share, compared with second-quarter 2002 net income of $56 million which included $1.4 billion in charges after tax associated with second-quarter actions, or $.03 per diluted share after $.81 per diluted share for the charges.

IBM spent approximately $106 million on share repurchases in the second quarter. There were 1.73 billion basic common shares outstanding at June 30, 2003. The average number of diluted common shares outstanding in the quarter was 1.76 billion compared with 1.73 billion shares in the same period of 2002.

Debt, including Global Financing, totaled $23.8 billion, a decline of $2.2 billion from year-end 2002. Under a management segment view, the non-global financing debt-to-capitalization ratio was 3.7 percent at June 30, 2003, and Global Financing debt declined $861 million from year-end 2002 to a total of $23.0 billion, resulting in a debt-to- equity ratio of 6.7 to 1.

Income from continuing operations for the six months ended June 30, 2003 was $3.1 billion compared with $1.7 billion for the same period of 2002 which included charges of $1.1 billion after tax associated with second-quarter 2002 actions. Diluted earnings per common share from continuing operations was $1.77 compared with $.98 after the second-quarter charges of $.64 per diluted share. Revenues from continuing operations for the six months ended June 30, 2003 totaled $41.7 billion, up 11 percent (4 percent at constant currency) compared with $37.7 billion for the six months of 2002.

For total operations, net income for the six months of 2003, including discontinued operations, was $3.1 billion, or $1.75 per diluted common share, compared with the six months of 2002 net income of $1.2 billion which included $1.4 billion in charges after tax associated with second-quarter 2002 actions, or $.71 per diluted share after $.81 per diluted share for the charges.

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