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Quarterly earnings
Third-Quarter Earnings Announcement
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IBM REPORTS 2005 THIRD-QUARTER RESULTS
- Total diluted earnings per common share of $.94, including
$.32 per diluted share for a "Homeland" repatriation tax
charge; without the charge, IBM diluted earnings per share
were $1.26, up 22 percent from third-quarter 2004, excluding
non-recurring items.
- Total revenue of $21.5 billion, down 8 percent versus the
third quarter of 2004, but up 4 percent without the impact of
the divested PC business.
ARMONK, N.Y., October 17, 2005 . . . IBM today announced third-quarter 2005 diluted earnings per common share of $.94 from continuing
operations, including 32 cents per share for a one-time charge of $525
million for taxes in connection with the planned repatriation of foreign
earnings. Diluted earnings per share for the third-quarter 2005 were
$1.26, excluding this one-time charge. Diluted earnings in the third
quarter of 2004 were $.92 per share, including 11 cents per share for a
one-time, pre-tax charge of $320 million for a partial settlement of
legal claims against IBM's pension plan. Excluding these non-recurring
items, diluted earnings per share of $1.26 in the third-quarter 2005
increased 23 cents, or 22 percent over the diluted earnings per share of
$1.03 in the year-ago quarter.
Third-quarter income from continuing operations was $1.5 billion,
including the one-time charge for taxes associated with the planned
repatriation of foreign earnings under the provision of the American
Jobs Creation Act of 2004 ("Homeland"). This compares with $1.6 billion
in the third quarter of 2004, which includes the one-time, pre-tax
charge for the legal settlement related to the pension plan. Without
the one-time charges, income from continuing operations of $2.0 billion
in the third quarter of 2005 increased $292 million, or 17 percent
versus the comparable period last year.
Total revenues for the third quarter of 2005 of $21.5 billion
decreased 8 percent (8 percent, adjusting for currency) from the third
quarter of 2004, which includes revenue from the divested PC business.
Excluding the PC revenue, revenues increased 4 percent (4 percent,
adjusting for currency) compared with the third quarter of 2004.
Samuel J. Palmisano, IBM chairman and chief executive officer,
said: "IBM had a good quarter. It showed the strength of our business
model across hardware, software and services, and we continued to see
the benefit of the strategic transitions that we've implemented in past
quarters. Our restructuring actions and our streamlined management in
Europe are starting to yield results. We saw excellent earnings-per-
share improvement this quarter, and many of the businesses that are
central to our strategy -- including middleware, midrange servers, and
Business Performance Transformation Services, especially in our
Engineering and Technology Services -- performed well, especially in
emerging markets around the world. We are encouraged by the client
reaction to the new zSeries mainframe, and IBM is well positioned in our
microelectronics business as the game console industry moves to its next
generation of products. Our clients are leveraging IBM's unique ability
to apply innovative, high-value skills and solutions to transform their
businesses and industries."
Third-quarter revenue growth was 4 percent (4 percent, adjusting
for currency) excluding the divested PC business. In the Americas,
third-quarter revenues were $9.6 billion, down 5 percent as reported (up
5 percent, adjusting for currency and PCs) from the 2004 period.
Revenues from Europe/Middle East/Africa were $6.9 billion, down 6
percent (up 5 percent, adjusting for currency and PCs). Asia-Pacific
revenues decreased 17 percent (2 percent, adjusting for currency and
PCs) to $4.3 billion. OEM revenues were $814 million, up 12 percent
compared with the 2004 third quarter.
Without the PC business, revenues increased in three of IBM's five
key industry sales units in the third-quarter 2005 led by good growth in
the Public and Distribution sectors, as well as in sales to Small and
Medium Businesses. IBM's revenues for Business Performance
Transformation Services grew over 35 percent in the quarter (and are up
over 30 percent year to date).
Revenues from Global Services, including maintenance, increased 3
percent (3 percent, adjusting for currency) to $11.7 billion in the
third quarter. IBM signed services contracts totaling $11.0 billion and
ended the quarter with an estimated services backlog, including
Strategic Outsourcing, Business Consulting Services, Integrated
Technology Services and Maintenance, of $113 billion, an increase of $3
billion from a year ago.
Hardware revenues decreased 32 percent (33 percent, adjusting for
currency) to $5.1 billion in the third-quarter 2005 compared to $7.5
billion in the year-ago period, which includes revenue from the divested
PC business. Hardware revenues without the PC business increased 7
percent (6 percent, adjusting for currency).
Hardware revenues for the Systems and Technology Group totaled $5.0
billion for the quarter, up 7 percent. Revenue growth from S&TG eServer
products was driven by iSeries midrange servers, which increased 25
percent; pSeries UNIX servers, an increase of 15 percent; and xSeries
servers, which increased 11 percent. Revenues from the zSeries
mainframe product decreased 4 percent compared with the year-ago period.
Total delivery of zSeries computing power, which is measured in MIPS
(millions of instructions per second), increased 18 percent. In
addition to eServers, revenues from Storage Systems and Microelectronics
increased 11 percent and 14 percent, respectively.
Revenues from Software were $3.8 billion, an increase of 5 percent
(5 percent, adjusting for currency) compared with the third quarter of
2004. Revenues from IBM's middleware brands, which include WebSphere,
DB2, Tivoli, Lotus and Rational products, were $3.0 billion, up 6
percent versus the third quarter of 2004. Operating systems revenues
decreased 2 percent to $588 million compared with the prior-year
quarter.
For the WebSphere family of software products, which facilitate
customers' ability to manage a wide variety of business processes using
open standards to interconnect applications, data and operating systems,
revenues increased 14 percent. Revenues for Information Management
software increased 10 percent with revenue growth of 4 percent in the
DB2 database family of software offerings, which enables clients to
leverage information on demand. Revenues from Tivoli software,
infrastructure software that enables customers to centrally manage
networks and storage, increased 8 percent, and revenues for Lotus
software, which allows collaborating and messaging by customers in real-
time communication and knowledge management, increased 12 percent.
Revenues from Rational software, integrated tools to improve the
processes of software development, increased 12 percent compared with
the year-ago quarter.
As a result, IBM expects to gain market share for the third quarter
in the collaborative software, systems management and security software,
Web services and data management categories.
Global Financing revenues declined 6 percent (7 percent, adjusting
for currency) in the third quarter to $600 million. Revenues from the
Enterprise Investments/Other area, which includes industry-specific IT
solutions such as product life-cycle management software, increased 9
percent (9 percent, adjusting for currency) to $302 million versus the
prior-year third quarter.
The company's total gross profit margin was 40.6 percent in the
2005 third quarter compared with 36.5 percent in the 2004 period, which
includes the divested PC business. Excluding the PC business, the third-quarter 2004 gross profit margin was 40.0 percent versus the 40.6
percent in the current-year quarter.
Total expense and other income decreased 8 percent to $5.8 billion,
or 3 percent without the prior-year charge of $320 million for the legal
settlement. SG&A expense of $4.6 billion decreased 10 percent year over
year. Excluding the prior-year legal settlement charge, SG&A expense
decreased 4 percent principally as a result of the sale of the PC
business. RD&E expense was $1.45 billion compared with $1.47 billion in
the year-ago period. Intellectual property and custom development
income decreased to $213 million compared with $259 million a year ago.
Other (income) and expense was $99 million of income in the third
quarter of 2005, versus $55 million of income in the same period last
year.
IBM's effective tax rate in the third-quarter 2005 was 48.0
percent, compared with 28.8 percent in the third quarter of 2004.
Substantially all of the tax rate increase is due to the incremental tax
charge of $525 million in connection with the planned repatriation of
foreign earnings in the current-year quarter and the tax impact
associated with the legal settlement in the prior-year quarter.
Excluding these one-time items, the third-quarter 2005 tax rate was 30.0
percent compared with 30.1 percent in the year-ago quarter.
Share repurchases totaled approximately $1.7 billion in the third
quarter. The weighted-average number of diluted common shares
outstanding in the third-quarter 2005 was 1.62 billion compared with
1.70 billion shares in the same period of 2004. As of September 30,
2005, there were 1.58 billion basic common shares outstanding.
IBM ended the third quarter of 2005 with $8.3 billion of cash on
hand. The balance sheet remains strong, and the company is well
positioned to take advantage of opportunities.
Debt, including Global Financing, totaled $21.4 billion, compared
with $22.9 billion at year-end 2004. From a management segment view,
the non-global financing debt-to-capitalization ratio was 3.1 percent at
the end of September 30, 2005, and Global Financing debt declined $1.8
billion from year-end 2004 to a total of $20.5 billion, resulting in a
debt-to-equity ratio of 6.8 to 1.
Year-To-Date 2005 Results
Income from continuing operations for the nine months ended
September 30, 2005 was $4.8 billion compared with $4.7 billion for the
same period of 2004, including the following non-recurring items in the
respective periods:
- Year-to-date 2005:
- charge of $525 million for taxes in connection with the
planned repatriation of foreign earnings,
- incremental pre-tax charges of $1.7 billion for restructuring,
- gain of $1.1 billion before tax on the sale of the PC business,
- other income of $775 million before tax due to a settlement
agreement entered into with Microsoft.
- Year-to-date 2004:
- pre-tax charge of $320 million for the partial settlement of
legal claims against IBM's pension plan.
Diluted earnings per share from continuing operations for nine
months of 2005 were $2.92 compared with $2.72 per diluted share for the
2004 period. Excluding these non-recurring items from both periods,
diluted earnings per share were $3.22 compared with diluted earnings per
share of $2.83 for the 2004 period, an increase of 14 percent. Revenues
from continuing operations for the nine-month period, which includes PC
revenues of $2.9 billion for the first four months of 2005 only, totaled
$66.7 billion, down 3 percent (5 percent, adjusting for currency)
compared with $68.6 billion for the nine months of 2004. Without the
revenues from the divested PC business, revenues totaled $63.8 billion,
up 5 percent (3 percent, adjusting for currency) compared with the nine-month period of 2004.
For total operations, net income for the first nine months of 2005,
including a loss from discontinued operations of $27 million, was $4.75
billion, or $2.90 per diluted share, compared with the nine months of
2004 net income of $4.65 billion, or $2.72 per diluted share, which
included a loss from discontinued operations of $3 million.
Forward-Looking and Cautionary Statements
Except for the historical information and discussions contained
herein, statements contained in this release may constitute forward-
looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve a number of
risks, uncertainties and other factors that could cause actual results
to differ materially, as discussed in the company's filings with the
U.S. Securities and Exchange Commission (SEC).
Presentation of Information in this Press Release
In an effort to provide investors with additional information
regarding the company's results as determined by generally accepted
accounting principles (GAAP), the company has also disclosed in this
press release the following non-GAAP information which management
believes provides useful information to investors:
- IBM results:
- without non-recurring items,
- without PC business,
- adjusting for currency.
The rationale for management's use of non-GAAP measures is included
as part of the supplementary materials presented within the third-quarter earnings materials. These materials are available on the IBM
investor relations Web site at www.ibm.com/investor and will be included in a subsequent Form 8-K.
Conference Call and Webcast
IBM's regular quarterly earnings conference call is scheduled to
begin at 4:30 p.m. EDT, today. Investors may participate by viewing the
Webcast at www.ibm.com/investor/3q05. Presentation charts will be
available on the Web site prior to the Webcast.
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INTERNATIONAL BUSINESS MACHINES CORPORATION
COMPARATIVE FINANCIAL RESULTS
(Unaudited; Dollars in millions except per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
Percent Percent
2005 2004* Change 2005 2004* Change
------- ------- ------- ------- ------- -------
REVENUE
Global Services $11,687 $11,312 3.3% $35,368 $33,608 5.2%
Gross margin 26.0% 24.3% 25.5% 24.1%
Hardware 5,121 7,501 -31.7% 17,426 21,659 -19.5%
Gross margin 37.1% 28.3% 32.4% 28.0%
Software 3,819 3,621 5.5% 11,191 10,545 6.1%
Gross margin 87.4% 87.2% 86.8% 86.5%
Global Financing 600 638 -5.8% 1,802 1,951 -7.6%
Gross margin 54.5% 60.1% 53.7% 60.0%
Enterprise Investments/
Other 302 277 9.2% 920 859 7.2%
Gross margin 42.8% 44.2% 46.6% 43.4%
TOTAL REVENUE 21,529 23,349 -7.8% 66,707 68,622 -2.8%
GROSS PROFIT 8,738 8,533 2.4% 25,767 24,831 3.8%
Gross margin 40.6% 36.5% 38.6% 36.2%
EXPENSE AND OTHER INCOME
S,G&A 4,632 5,162 -10.3% 16,062 14,640 9.7%
% of revenue 21.5% 22.1% 24.1% 21.3%
R,D&E 1,447 1,468 -1.4% 4,383 4,360 0.5%
% of revenue 6.7% 6.3% 6.6% 6.4%
Intellectual property
and custom development
income (213) (259) -17.5% (720) (871) -17.3%
Other (income)
and expense (99) (55) 80.7% (1,788) (19) nm
Interest expense 56 32 75.7% 172 100 72.7%
TOTAL EXPENSE AND
OTHER INCOME 5,823 6,348 -8.3% 18,109 18,210 -0.6%
% of revenue 27.0% 27.2% 27.1% 26.5%
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES 2,915 2,185 33.4% 7,658 6,621 15.7%
Pre-tax margin 13.5% 9.4% 11.5% 9.6%
Provision for
income taxes 1,399 631 121.7% 2,884 1,966 46.7%
Effective tax
rate 48.0% 28.8% 37.7% 29.7%
INCOME FROM CONTINUING
OPERATIONS $1,516 $1,554 -2.5% $4,774 $4,655 2.6%
Net margin 7.0% 6.7% 7.2% 6.8%
DISCONTINUED OPERATIONS
Loss from discontinued
operations 0 0 27 3
NET INCOME $1,516 $1,554 -2.5% $4,747 $4,652 2.0%
====== ====== ====== ======
EARNINGS/(LOSS)PER SHARE
OF COMMON STOCK:
ASSUMING DILUTION
CONTINUING
OPERATIONS $0.94 $0.92 2.2% $2.92 $2.72 7.4%
DISCONTINUED
OPERATIONS (0.00) (0.00) (0.02) (0.00)
------ ------ ------ ------
TOTAL $0.94 $0.92 2.2% $2.90 $2.72 6.6%
====== ====== ====== ======
BASIC
CONTINUING
OPERATIONS $0.95 $0.93 2.2% $2.97 $2.77 7.2%
DISCONTINUED
OPERATIONS (0.00) (0.00) (0.02) (0.00)
------ ------ ------ ------
TOTAL $0.95 $0.93 2.2% $2.95 $2.77 6.5%
====== ====== ====== ======
WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING (M's)
ASSUMING DILUTION 1,617.2 1,698.1 1,635.2 1,712.3
BASIC 1,591.3 1,669.6 1,607.9 1,680.3
nm - not meaningful
* Restated 2004 financial results to include the impact of share-based
compensation expense.
INTERNATIONAL BUSINESS MACHINES CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)
At At
(Dollars in millions) September 30, December 31, Percent
2005 2004* Change
------------ ----------- -------
ASSETS
Cash, cash equivalents,
and marketable securities $8,254 $10,570 -21.9%
Receivables - net, inventories,
prepaid expenses 30,889 36,573 -15.5%
Plant, rental machines,
and other property - net 14,042 15,175 -7.5%
Investments and other assets 47,824 48,685 -1.8%
-------- --------
TOTAL ASSETS $101,009 $111,003 -9.0%
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $4,050 $8,099 -50.0%
Long-term debt 17,372 14,828 17.2%
-------- --------
Total debt 21,422 22,927 -6.6%
Accounts payable, taxes,
and accruals 25,914 31,687 -18.2%
Other liabilities 23,438 24,701 -5.1%
-------- --------
TOTAL LIABILITIES 70,774 79,315 -10.8%
STOCKHOLDERS' EQUITY 30,235 31,688 -4.6%
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $101,009 $111,003 -9.0%
======== ========
* Restated 2004 financial position to include the impact of share-based
compensation expense.
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
THIRD QUARTER 2005
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) --------- Revenue -------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Services $11,687 $724 $12,411 $1,153 9.3%
% change 3.3% -8.5% 2.5% 15.9%
Systems and Technology
Group 4,988 268 5,256 385 7.3%
% change 6.9% -2.9% 6.4% -2.3%
Software 3,819 484 4,303 1,173 27.3%
% change 5.5% 11.8% 6.1% 29.3%
Global Financing 599 289 888 363 40.9%
% change -5.5% -6.5% -5.8% 6.5%
Enterprise Investments 284 2 286 (39) -13.6%
% change 10.5% 0.0% 10.4% 32.8%
Personal Computing
Division 0 0 0 0 0.0%
TOTAL REPORTABLE SEGMENTS 21,377 1,767 23,144 3,035 13.1%
% change -7.9% -4.6% -7.6% 17.6%
Eliminations / Other 152 (1,767) (1,615) (120)
TOTAL IBM CONSOLIDATED $21,529 $0 $21,529 $2,915 13.5%
% change -7.8% -7.8% 33.4%
THIRD QUARTER 2004**
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) --------- Revenue -------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Services $11,312 $791 $12,103 $995 8.2%
Systems and Technology
Group* 4,665 276 4,941 394 8.0%
Software 3,621 433 4,054 907 22.4%
Global Financing 634 309 943 341 36.2%
Enterprise Investments 257 2 259 (58) -22.4%
Personal Computing
Division 2,713 41 2,754 2 0.1%
TOTAL REPORTABLE SEGMENTS 23,202 1,852 25,054 2,581 10.3%
Eliminations / Other 147 (1,852) (1,705) (396)
TOTAL IBM CONSOLIDATED $23,349 $0 $23,349 $2,185 9.4%
* Systems and Technology Group segment results have been reclassified
to conform with current reporting structure.
** Restated 2004 financial results to include the impact of share-based
compensation expense.
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
NINE MONTHS 2005
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) --------- Revenue -------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Services $35,368 $2,244 $37,612 $1,876 5.0%
% change 5.2% -2.9% 4.7% -31.7%
Systems and Technology
Group 14,132 763 14,895 737 4.9%
% change 4.4% -4.7% 3.9% -31.8%
Software 11,191 1,416 12,607 2,948 23.4%
% change 6.1% 9.7% 6.5% 17.4%
Global Financing 1,798 1,013 2,811 1,092 38.8%
% change -7.8% 15.8% -0.5% 4.5%
Enterprise Investments 837 7 844 (131) -15.5%
% change 4.5% 16.7% 4.6% 19.6%
Personal Computing
Division 2,876 33 2,909 (165) nm
% change nm nm nm nm
TOTAL REPORTABLE SEGMENTS 66,202 5,476 71,678 6,357 8.9%
% change -2.9% 1.9% -2.6% -11.4%
Eliminations / Other 505 (5,476) (4,971) 1,301
TOTAL IBM CONSOLIDATED $66,707 $0 $66,707 $7,658 11.5%
% change -2.8% -2.8% 15.7%
nm - not meaningful
NINE MONTHS 2004**
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) --------- Revenue -------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Services $33,608 $2,312 $35,920 $2,747 7.6%
Systems and Technology
Group* 13,530 801 14,331 1,081 7.5%
Software 10,545 1,291 11,836 2,512 21.2%
Global Financing 1,951 875 2,826 1,045 37.0%
Enterprise Investments 801 6 807 (163) -20.2%
Personal Computing
Division 7,769 91 7,860 (46) -0.6%
TOTAL REPORTABLE SEGMENTS 68,204 5,376 73,580 7,176 9.8%
Eliminations / Other 418 (5,376) (4,958) (555)
TOTAL IBM CONSOLIDATED $68,622 $0 $68,622 $6,621 9.6%
* Systems and Technology Group segment results have been reclassified
to conform with current reporting structure.
** Restated 2004 financial results to include the impact of share-based
compensation expense.
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