10-QPeriod: Q3 FY2004

INTERNATIONAL BUSINESS MACHINES CORP Quarterly Report for Q3 Ended Sep 30, 2004

Filed October 28, 2004For Securities:IBM

Summary

International Business Machines Corp. (IBM) reported solid financial results for the third quarter and the first nine months of 2004. The company demonstrated revenue growth across most segments, driven by improved demand in Global Services and key hardware products like zSeries and xSeries servers. While total revenue saw an 8.9% increase year-over-year for both periods, income from continuing operations saw a more modest 0.9% rise in Q3 and a 10.1% increase in the nine-month period. This was partly due to a significant one-time charge of $320 million related to the settlement of legal claims against the IBM Personal Pension Plan. IBM continues to focus on its "on demand" business model, with notable strengths in emerging markets and specific industry sectors like Financial Services and Communications. The company also saw improvements in gross profit margins, particularly in Hardware and Software segments, driven by operational efficiencies and product performance. Despite a significant increase in selling, general, and administrative expenses, partly due to the pension plan charge, the company maintained a stable expense-to-revenue ratio for the nine-month period. Overall, IBM presented a picture of steady operational performance, underpinned by strategic investments and market share gains, though tempered by a notable legal settlement cost.

Key Highlights

  • 1Total revenue increased by 8.9% for both the third quarter and the first nine months of 2004 compared to the prior year, reaching $23.4 billion and $68.8 billion, respectively.
  • 2Income from continuing operations grew by 0.9% in the third quarter to $1.8 billion and by 10.1% in the first nine months to $5.4 billion.
  • 3A $320 million one-time charge was recorded in the third quarter related to the partial settlement of legal claims against the IBM Personal Pension Plan.
  • 4Gross profit margin improved to 36.9% in Q3 2004 from 36.3% in Q3 2003, and to 36.6% for the nine months from 36.4%.
  • 5Global Services revenue saw a 9.7% increase in Q3 and an 8.4% increase for the nine months, driven by Strategic Outsourcing and Integrated Technology Services.
  • 6Hardware revenue increased by 12.2% in Q3 and 13.4% for the nine months, with strong contributions from zSeries and xSeries servers, and Personal Systems.
  • 7The company repurchased approximately 15 million shares of common stock during the third quarter for about $1.28 billion.

Frequently Asked Questions

Revenue increased due to improved demand in Global Services and key hardware products, particularly zSeries and xSeries servers. Growth in emerging markets and specific industry sectors like Financial Services and Communications also contributed significantly.

IBM incurred a one-time charge of $320 million in the third quarter of 2004 to settle certain legal claims against the IBM Personal Pension Plan. This charge impacted income from continuing operations and increased total expense and other income.

Global Services and Hardware segments showed strong revenue growth. Software revenue increased at a moderate pace, while Global Financing revenue declined. The Systems and Technology Group within Hardware was a key growth driver, supported by strong performance in zSeries and xSeries servers.

IBM anticipates continued revenue growth driven by its 'on demand' business model and strategic focus areas like Business Performance Transformation Services. However, the company also faces ongoing challenges such as product transitions in certain hardware lines and competitive pressures in the software market. The company expects its effective tax rate to approximate 30%, with potential adjustments from new tax legislation regarding repatriated foreign earnings.