10-QPeriod: Q2 FY2001

INTERNATIONAL BUSINESS MACHINES CORP Quarterly Report for Q2 Ended Jun 30, 2001

Filed August 14, 2001For Securities:IBM

Summary

IBM's second-quarter and first-half 2001 results demonstrate resilience amidst a challenging IT industry, with revenue remaining relatively flat year-over-year but showing growth in constant currency. The company reported improved profitability and a higher diluted earnings per share compared to the prior year. Key drivers of this performance include strong growth in Global Services, which benefited from recent contract signings, and robust performance in Enterprise Systems, particularly zSeries mainframes and storage products. While hardware revenue experienced a decline, largely due to weakness in personal computers and hard disk drives, the company highlighted strategic shifts and technological leadership as crucial for navigating the evolving market landscape towards solutions and services. Despite some headwinds like ongoing weakness in PC and HDD businesses, negative currency translation effects, and a slowdown in Microelectronics, IBM's strategic positioning in services and infrastructure appears to be paying off. The company is actively managing its expenses, with Selling, General, and Administrative expenses showing a slight decline as a percentage of revenue. Significant investments in R&D and property, plant, and equipment underscore IBM's commitment to future growth. The company also initiated the Informix database software acquisition and redeemed preferred stock, signaling strategic capital allocation. Overall, the results indicate IBM's ability to maintain financial strength and adapt to market dynamics.

Key Highlights

  • 1Total revenue for the second quarter of 2001 was $21.57 billion, essentially flat compared to the prior year, but up 5% in constant currency.
  • 2Net income for the quarter increased to $2.045 billion from $1.941 billion in the prior year, with diluted EPS rising to $1.15 from $1.06.
  • 3Global Services revenue saw a significant increase of 6.8% (13% in constant currency) driven by strategic outsourcing and business innovation services, with new contract signings reaching approximately $16 billion.
  • 4Hardware revenue declined 5.5% (1% in constant currency) due to lower personal computer and HDD sales, though partially offset by growth in Microelectronics, zSeries mainframes, and storage products.
  • 5Gross profit margin improved to 37.3% from 36.3% year-over-year, driven by higher margins in high-end servers, storage, and Global Services.
  • 6The company is actively managing its capital structure, with a share repurchase program continuing and a recent announcement to acquire Informix Corporation's database software business.
  • 7Total current assets decreased while current liabilities saw a larger decrease, leading to an increase in working capital and an improved current ratio of 1.35:1 from 1.21:1.

Frequently Asked Questions

IBM's total revenue for the second quarter of 2001 was $21.568 billion, which was essentially flat compared to the $21.651 billion reported in the second quarter of 2000. However, when accounting for currency fluctuations (constant currency), revenue actually increased by 5%.

Profitability improved due to several factors. Global Services revenue grew, and the segment's gross profit margin also increased. Additionally, hardware gross profit margins improved, particularly for pSeries, iSeries, and zSeries servers, as well as storage products. The company also benefited from improved margins in certain technology areas and strategic cost management, leading to a higher overall gross profit margin of 37.3%.

Key challenges include ongoing weakness in the personal computer and hard disk drive (HDD) businesses, negative effects of currency translation, and a slowdown in the Microelectronics business as OEM customers reduce purchases. Opportunities lie in the company's strategic focus on solutions over products, technological leadership in hardware and software, and its strong position in the growing services market, particularly in areas like data warehousing and business intelligence, further bolstered by the planned acquisition of Informix's database business.

IBM's Global Financing segment remains debt-dependent, with a debt-to-equity ratio of 6.7x at June 30, 2001, which is within management's target range. Non-Global Financing debt saw a seasonal increase. The company renewed its committed global credit facility, reducing it from $10 billion to $8 billion, and established a new $4 billion, 364-day facility. As of June 30, 2001, a significant portion of these facilities remained unused, indicating strong liquidity.