10-QPeriod: Q3 FY2001

INTERNATIONAL BUSINESS MACHINES CORP Quarterly Report for Q3 Ended Sep 30, 2001

Filed November 14, 2001For Securities:IBM

Summary

International Business Machines Corporation (IBM) reported its third-quarter and nine-month results for the period ending September 30, 2001. Overall revenue saw a decline in the third quarter compared to the prior year, largely driven by a significant decrease in Hardware revenue, particularly in personal computers and microelectronics. However, this was partially offset by growth in Global Services and Software revenue. The company also completed the acquisition of Informix's database software business, which is expected to bolster its software portfolio. Despite the revenue dip, IBM demonstrated resilience through a slight improvement in gross profit margin and effective expense management. Net income for the nine months remained stable year-over-year, supported by share repurchases that reduced the average number of outstanding shares. The company's financial position remains strong with solid operating cash flow and ample liquidity, although it faces ongoing challenges in a difficult economic environment and a shifting IT landscape.

Key Highlights

  • 1Total revenue for the third quarter decreased by 6.2% year-over-year (3% in constant currency), primarily due to a significant 20.9% drop in Hardware revenue.
  • 2Global Services revenue showed resilience, increasing by 5.4% (9% in constant currency) year-over-year, with strong growth in maintenance and strategic outsourcing.
  • 3Software revenue grew by 9.7% (14% in constant currency), bolstered by the acquisition of Informix's database software business in the third quarter.
  • 4The company repurchased shares, leading to a decrease in the average number of outstanding common shares, which positively impacted earnings per share.
  • 5Gross profit margin improved to 36.2% in the third quarter from 35.4% in the prior year, indicating better cost management.
  • 6Operating cash flow for the first nine months was strong at $9.4 billion, an increase from $4.5 billion in the prior year period.
  • 7IBM announced an additional $3.5 billion share repurchase authorization, signaling continued commitment to returning capital to shareholders.

Frequently Asked Questions

The acquisition of Informix's database software business was completed in the third quarter of 2001. It contributed to the growth in Software revenue, accounting for almost half of the middleware revenue increase in the third quarter. The purchase price allocated was $1 billion, with $889 million paid and the remainder due in 2002. Goodwill from the acquisition was recorded at $551 million.

Hardware revenue decreased significantly due to several factors. The personal computer market experienced continued weakness and price pressures, leading to a substantial decline in PC revenue. The microelectronics revenue also decreased substantially due to the cyclical downturn in the semiconductor market. While zSeries mainframe servers and iSeries mid-market servers showed growth, this was not enough to offset the broader declines.

IBM's Selling, General, and Administrative (SG&A) expense remained essentially flat year-over-year for both the third quarter and the first nine months. The company is leveraging technology, such as e-procurement and e-business transformation initiatives, to improve efficiency and reduce costs. Despite expense management, investments in Research, Development, and Engineering were maintained or slightly increased to support future growth.

Global Services revenue continued to grow, increasing 5.4% year-over-year in the third quarter (9% in constant currency). This growth was driven by strong performance in Strategic Outsourcing Services and Integrated Technology Services. Although the consulting and integration environment was affected by economic slowdown and the events of September 11, the company signed approximately $10 billion in new contracts for Global Services in the third quarter, with a backlog of $97 billion at the end of the period.