IBM REPORTS 2004 SECOND-QUARTER RESULTS
ARMONK, N.Y., July 15, 2004 . . . IBM today announced second-quarter 2004 diluted earnings per common share of $1.16 from continuing operations compared with diluted earnings of $.98 per share in the same period of 2003, an increase of 18 percent. Second-quarter income from continuing operations was $2.0 billion compared with $1.7 billion a year ago, an increase of 15 percent. Revenues from continuing operations for the second quarter were $23.2 billion, up 7 percent compared with the second quarter of 2003 revenues of $21.6 billion.
Samuel J. Palmisano, IBM chairman and chief executive officer, said: "The IBM team delivered another fine quarter, which demonstrated the power of our business model and the advantages of our continued focus on serving enterprises and institutions around the world.
"We're seeing more and more clients move toward becoming on demand businesses. This is increasing demand for our portfolio of services and computing infrastructure products. It was another strong quarter for large-scale systems, led by zSeries enterprise servers. IBM Global Services signed more than $10 billion in new business, and we are off to a strong start in the emerging Business Process Transformation Services opportunity. We saw first-half growth of roughly 40 percent over last year, and we continue to invest heavily in this growth segment. IBM also grew significantly in emerging geographic markets in the first half, with 35 percent combined growth in China, Russia, India and Brazil. Our balance sheet is strong, with $8.2 billion of cash available, and we continue to post an excellent return on invested capital.
"At a time of great change and opportunity in the IT industry, we remain focused on strengthening and broadening our client relationships through innovation and by delivering business solutions only IBM can provide. We continue to improve the operational effectiveness of the company. We are confident about our prospects going forward."
Second-quarter revenue growth of 7 percent (4 percent, adjusting for currency) was driven by growth across all geographies. In the Americas, second-quarter revenues from continuing operations were $9.7 billion, up 2 percent (2 percent, adjusting for currency) from the 2003 period. Revenues from Europe/Middle East/Africa were $7.5 billion, an increase of 9 percent (2 percent, adjusting for currency). Asia-Pacific revenues grew 13 percent (6 percent, adjusting for currency) to $5.2 billion. OEM revenues increased 19 percent to $701 million compared with the second quarter of 2003.
Revenues grew at a solid pace in four of IBM's five industry sectors in the second quarter with particularly strong growth from the Financial Services sector and Industrial sector, as well as sales to Small and Medium Businesses.
Revenues from Global Services, including maintenance, increased 7 percent (2 percent, adjusting for currency) to $11.3 billion in the second quarter. Global Services revenues, excluding maintenance, increased 7 percent as well (3 percent, adjusting for currency). IBM signed services contracts totaling more than $10 billion and ended the quarter with an estimated services backlog, including Strategic Outsourcing, Business Consulting Services, Integrated Technology Services and Maintenance, of $118 billion.
Hardware revenues from continuing operations increased 12 percent (10 percent, adjusting for currency) to $7.4 billion in the second quarter versus the second-quarter 2003. In the current quarter, revenues from the Systems and Technology Group totaled $4.2 billion, up 10 percent due to eServer revenue increases for zSeries servers, which had particularly strong results, and xSeries Intel-based servers. The total delivery of zSeries computing power as measured in MIPS (millions of instructions per second) increased 75 percent in the quarter compared with the second quarter of 2003. Revenues for the eServer iSeries midrange servers slowed significantly, as did pSeries UNIX servers to a lesser degree, with both results reflecting lower demand partly due to the product transition to POWER5 architecture. Storage Systems revenues increased due to good demand for external midrange disk and tape products, and revenues from OEM Technology increased. Personal Systems Group revenues increased 16 percent to $3.2 billion, led by strong growth in mobile personal computers.
Revenues from Software were $3.5 billion, essentially flat compared with the second quarter of 2003 (down 4 percent, adjusting for currency). Revenues from IBM's middleware brands, which include WebSphere, DB2, Rational, Tivoli and Lotus products, were $2.7 billion, the same as the second quarter of 2003. Operating systems revenues decreased 2 percent to $577 million compared with the second quarter of 2003.
WebSphere software, which facilitates customers' ability to manage a wide variety of business processes using open standards to interconnect applications, data and operating systems, extended its lead in market share by 5 points for full-year 2003, according to an industry report. Revenues for Data Management decreased 3 percent including revenues for DB2 database software, which increased 5 percent. Revenues from Tivoli software (infrastructure software that enables customers to centrally manage networks and storage) decreased 5 percent, and revenues for Lotus software, which enables customers to communicate, collaborate and learn effectively, decreased 2 percent. Revenues from Rational (comprehensive software development tools) decreased 5 percent compared with the second quarter of 2003.
Global Financing revenues declined 3 percent (6 percent, adjusting for currency) in the second quarter to $651 million. Revenues from the Enterprise Investments/Other area, which includes industry-specific IT solutions such as product life-cycle management software, increased 23 percent (19 percent, adjusting for currency) to $294 million compared with the second quarter of 2003.
The company's total gross profit margin from continuing operations was 36.8 percent in the 2004 second quarter, compared with 37.0 percent in the second quarter of 2003.
In the second quarter of 2004, total expense and other income from continuing operations of $5.7 billion increased 3 percent over the year-earlier period. The company's selling, general and administrative expense-to-revenue ratio improved to 20.0 percent in the quarter compared with 20.6 percent in the second-quarter 2003, while SG&A expense increased 4 percent to $4.6 billion. Research, development and engineering expense increased 16 percent to $1.4 billion. Intellectual property and custom development income increased significantly in the quarter reflecting an IP transaction with AMCC for $208 million. Other (income) and expense was $23 million of net expense in the second quarter of 2004 versus $4 million of net expense in the same period last year.
IBM's effective tax rate from continuing operations in the second-quarter 2004 was 30.0 percent, the same as the second quarter of 2003.
For total operations, net income for the second quarter of 2004, including a loss from discontinued operations of $2 million, was $2.0 billion, or $1.16 per diluted common share. Net income for the second quarter of 2003, including a loss from discontinued operations of $20 million, was $1.7 billion, or $.97 per diluted share.
Share repurchases totaled approximately $1.3 billion in the second quarter. The weighted-average number of diluted common shares outstanding in the quarter was 1.71 billion compared with 1.76 billion shares in the same period of 2003. As of June 30, 2004, there were 1.68 billion basic shares outstanding.
Debt, including Global Financing, totaled $21.9 billion, compared with $23.6 billion at year-end 2003. From a management segment view, the non-global financing debt-to-capitalization ratio was 2.4 percent as of June 30, 2004, and Global Financing debt declined $2.0 billion from year-end 2003 to a total of $21.3 billion, resulting in a debt-to-equity ratio of 6.9 to 1.
Year-To-Date 2004 Results
Income from continuing operations for the six months ended June 30, 2004 was $3.6 billion compared with $3.1 billion for the same period of 2003, an increase of 15 percent. Diluted earnings per common share from continuing operations was $2.09 compared with $1.77 per diluted share for the 2003 period, an increase of 18 percent. Revenues from continuing operations for the six months ended June 30, 2004 totaled $45.4 billion, up 9 percent (3 percent, adjusting for currency) compared with $41.7 billion for the six months of 2003.
For total operations, net income for the six months of 2004, including a loss from discontinued operations of $3 million, was $3.6 billion, or $2.08 per diluted common share, compared with the six months of 2003 net income of $3.1 billion, or $1.75 per diluted share, which included a loss from discontinued operations of $23 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 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:
- return on invested capital
- adjusting for currency
The rationale for management's use of non-GAAP measures is included as part of the supplementary materials presented within the second-quarter earnings materials. These materials are available on the IBM investor relations Web site at www.ibm.com/investor.
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/2q04.
INTERNATIONAL BUSINESS MACHINES CORPORATION
COMPARATIVE FINANCIAL RESULTS
(Unaudited; Dollars in millions except per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
Percent Percent
2004 2003 Change 2004 2003 Change
------- ------- ------- ------- ------- -------
REVENUE
Global Services $11,327 $10,635 6.5% $22,426 $20,804 7.8%
Gross margin 25.2% 25.9% 24.8% 25.4%
Hardware 7,423 6,613 12.3% 14,158 12,421 14.0%
Gross margin 29.2% 26.9% 28.0% 26.8%
Software 3,458 3,471 -0.4% 6,924 6,600 4.9%
Gross margin 86.3% 86.2% 86.2% 85.4%
Global Financing 651 672 -3.2% 1,313 1,377 -4.6%
Gross margin 59.4% 54.6% 60.0% 56.8%
Enterprise Investments/
Other 294 240 22.6% 582 494 17.7%
Gross margin 46.4% 41.9% 43.0% 39.2%
TOTAL REVENUE 23,153 21,631 7.0% 45,403 41,696 8.9%
GROSS PROFIT 8,525 7,998 6.6% 16,534 15,231 8.6%
Gross margin 36.8% 37.0% 36.4% 36.5%
EXPENSE AND OTHER INCOME
S,G&A 4,632 4,460 3.9% 9,116 8,675 5.1%
% of revenue 20.0% 20.6% 20.1% 20.8%
R,D&E 1,426 1,226 16.3% 2,793 2,421 15.4%
% of revenue 6.2% 5.7% 6.2% 5.8%
Intellectual property
and custom development
income (432) (199) 117.3% (612) (481) 27.2%
Other (income)
and expense 23 4 451.2% 36 88 -58.5%
Interest expense 33 41 -20.8% 68 81 -16.7%
TOTAL EXPENSE AND
OTHER INCOME 5,682 5,532 2.7% 11,401 10,784 5.7%
% of revenue 24.5% 25.6% 25.1% 25.9%
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES 2,843 2,466 15.3% 5,133 4,447 15.4%
Pre-tax margin 12.3% 11.4% 11.3% 10.7%
Provision for
income taxes 853 741 15.3% 1,540 1,335 15.4%
Effective tax
rate 30.0% 30.0% 30.0% 30.0%
INCOME FROM CONTINUING
OPERATIONS $1,990 $1,725 15.3% $3,593 $3,112 15.4%
Net margin 8.6% 8.0% 7.9% 7.5%
DISCONTINUED OPERATIONS
Loss from discontinued
operations 2 20 3 23
NET INCOME $1,988 $1,705 16.6% $3,590 $3,089 16.2%
====== ====== ====== ======
EARNINGS/(LOSS)PER SHARE
OF COMMON STOCK:
ASSUMING DILUTION
CONTINUING
OPERATIONS $1.16 $0.98 18.4% $2.09 $1.77 18.1%
DISCONTINUED
OPERATIONS (0.00) (0.01) (0.00) (0.01)
------ ------ ------ ------
TOTAL $1.16 $0.97 19.6% $2.08* $1.75* 18.9%
====== ====== ====== ======
BASIC
CONTINUING
OPERATIONS $1.18 $1.00 18.0% $2.13 $1.80 18.3%
DISCONTINUED
OPERATIONS (0.00) (0.01) (0.00) (0.01)
------ ------ ------ ------
TOTAL $1.18 $0.99 19.2% $2.13 $1.79 19.0%
====== ====== ====== ======
WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING (M's)
ASSUMING
DILUTION 1,713.4 1,763.7 1,721.7 1,761.1
BASIC 1,679.6 1,729.8 1,685.6 1,727.6
* Does not total due to rounding.
INTERNATIONAL BUSINESS MACHINES CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)
At At
(Dollars in millions) June 30, December 31, Percent
2004 2003 Change
-------- ----------- -------
ASSETS
Cash, cash equivalents,
and marketable securities $8,193 $7,647 7.1%
Receivables - net, inventories,
prepaid expenses 33,216 37,351 -11.1%
Plant, rental machines,
and other property - net 14,569 14,689 -0.8%
Investments and other assets 43,604 44,770 -2.6%
-------- --------
TOTAL ASSETS $99,582 $104,457 -4.7%
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $7,505 $6,646 12.9%
Long-term debt 14,421 16,986 -15.1%
-------- --------
Total debt 21,926 23,632 -7.2%
Accounts payable, taxes,
and accruals 26,852 31,254 -14.1%
Other liabilities 21,974 21,707 1.2%
-------- --------
TOTAL LIABILITIES 70,752 76,593 -7.6%
STOCKHOLDERS' EQUITY 28,830 27,864 3.5%
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $99,582 $104,457 -4.7%
======== ========
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
SECOND QUARTER 2004
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) -------- Revenue --------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Services $11,327 $759 $12,086 $1,089 9.0%
% change 6.5% 9.2% 6.7% -6.8%
Systems and Technology
Group 4,154 276 4,430 603 13.6%
% change 9.7% 43.8% 11.4% 151.3%
Personal Systems Group 3,165 40 3,205 27 0.8%
% change 16.2% -9.1% 15.8% 437.5%
Software 3,458 457 3,915 958 24.5%
% change -0.4% 17.2% 1.4% 12.7%
Global Financing 652 286 938 348 37.1%
% change -4.3% -6.8% -5.1% 17.6%
Enterprise Investments 269 2 271 (46) -17.0%
% change 18.5% 100.0% 18.9% 47.1%
TOTAL SEGMENTS 23,025 1,820 24,845 2,979 12.0%
% change 7.0% 11.7% 7.3% 21.1%
Eliminations / Other 128 (1,820) (1,692) (136)
TOTAL IBM $23,153 $0 $23,153 $2,843 12.3%
% change 7.0% 7.0% 15.3%
SECOND QUARTER 2003
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) -------- Revenue --------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Services $10,635 $695 $11,330 $1,168 10.3%
Systems and Technology
Group * 3,786 192 3,978 240 6.0%
Personal Systems Group 2,723 44 2,767 (8) -0.3%
Software 3,471 390 3,861 850 22.0%
Global Financing 681 307 988 296 30.0%
Enterprise Investments 227 1 228 (87) -38.2%
TOTAL SEGMENTS 21,523 1,629 23,152 2,459 10.6%
Eliminations / Other 108 (1,629) (1,521) 7
TOTAL IBM $21,631 $0 $21,631 $2,466 11.4%
* 2003 Technology Group and Systems Group segment results have been
reclassified to conform with current reporting structure.
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
SIX MONTHS 2004
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) -------- Revenue --------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Services $22,426 $1,521 $23,947 $2,080 8.7%
% change 7.8% 9.1% 7.9% -3.3%
Systems and Technology
Group 7,930 512 8,442 773 9.2%
% change 11.8% 35.8% 13.0% 84.5%
Personal Systems Group 5,991 63 6,054 16 0.3%
% change 17.2% -21.3% 16.6% 120.8%
Software 6,924 858 7,782 1,812 23.3%
% change 4.9% 10.4% 5.5% 21.7%
Global Financing 1,317 566 1,883 722 38.3%
% change -4.7% -6.0% -5.1% 26.9%
Enterprise Investments 544 4 548 (98) -17.9%
% change 16.2% 100.0% 16.6% 36.4%
TOTAL SEGMENTS 45,132 3,524 48,656 5,305 10.9%
% change 8.9% 9.0% 8.9% 20.7%
Eliminations / Other 271 (3,524) (3,253) (172)
TOTAL IBM $45,403 $0 $45,403 $5,133 11.3%
% change 8.9% 8.9% 15.4%
SIX MONTHS 2003
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) -------- Revenue --------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Services $20,804 $1,394 $22,198 $2,151 9.7%
Systems and Technology
Group * 7,094 377 7,471 419 5.6%
Personal Systems Group 5,113 80 5,193 (77) -1.5%
Software 6,600 777 7,377 1,489 20.2%
Global Financing 1,382 602 1,984 569 28.7%
Enterprise Investments 468 2 470 (154) -32.8%
TOTAL SEGMENTS 41,461 3,232 44,693 4,397 9.8%
Eliminations / Other 235 (3,232) (2,997) 50
TOTAL IBM $41,696 $0 $41,696 $4,447 10.7%
* 2003 Technology Group and Systems Group segment results have been
reclassified to conform with current reporting structure.
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