10-QPeriod: Q2 FY2005

INTERNATIONAL BUSINESS MACHINES CORP Quarterly Report for Q2 Ended Jun 30, 2005

Filed July 26, 2005For Securities:IBM

Summary

International Business Machines Corp. (IBM) reported its financial results for the second quarter and first six months of 2005. For the quarter ended June 30, 2005, total revenue was $22.27 billion, a decrease of 3.6% year-over-year, while income from continuing operations rose 6.6% to $1.85 billion. For the six-month period, revenue was largely flat at $45.18 billion, with income from continuing operations increasing 5.1% to $3.26 billion. A significant event during the quarter was the completion of the divestiture of IBM's Personal Computing Division to Lenovo, which contributed a pre-tax gain of $1.1 billion to 'Other (income) and expense.' IBM also recorded a substantial $1.83 billion pre-tax restructuring charge, primarily for workforce reductions and facility consolidations, mainly in Global Services. These events, along with a $775 million antitrust settlement gain from Microsoft, significantly impacted the 'Other (income) and expense' line item. The company's core Global Services segment showed continued strength, with revenue up 6.3% for the quarter. Hardware revenue declined significantly, largely due to the divestiture of the PC business, though the Systems and Technology Group showed growth. Software revenue also performed well, increasing 10.5% in the quarter, driven by Middleware offerings. IBM ended the period with $8.65 billion in cash and cash equivalents.

Key Highlights

  • 1Total revenue for Q2 2005 was $22.27 billion, a 3.6% decrease compared to Q2 2004.
  • 2Income from continuing operations increased 6.6% to $1.85 billion for Q2 2005.
  • 3IBM completed the divestiture of its Personal Computing Division to Lenovo for $1.725 billion, resulting in a $1.097 billion pre-tax gain.
  • 4The company incurred $1.83 billion in pre-tax restructuring charges, primarily related to workforce reductions.
  • 5Global Services revenue grew 6.3% year-over-year to $11.99 billion in Q2 2005.
  • 6Software revenue increased 10.5% year-over-year to $3.82 billion in Q2 2005.
  • 7Effective January 1, 2005, IBM adopted SFAS No. 123(R) for share-based payments, impacting reported expenses and prior period comparability.

Frequently Asked Questions

In the second quarter of 2005, IBM's Global Services segment demonstrated strong performance with revenue increasing 6.3% to $11.99 billion. The Software segment also showed robust growth, with revenue up 10.5% to $3.82 billion. Hardware revenue experienced a significant decline of 26.0%, largely attributable to the divestiture of the Personal Computing Division. However, the Systems and Technology Group within Hardware showed a 4.7% increase in revenue.

Two significant events significantly impacted IBM's Q2 2005 results. First, the company completed the sale of its Personal Computing Division to Lenovo, which generated a pre-tax gain of $1.097 billion. Second, IBM implemented substantial restructuring actions across its global operations, resulting in pre-tax charges of $1.83 billion, mainly for workforce reductions. Additionally, a $775 million antitrust settlement gain from Microsoft was recorded.

Effective January 1, 2005, IBM adopted SFAS No. 123(R), 'Share-Based Payment.' This standard requires stock-based compensation to be recognized as an expense based on its fair value at the grant date. The company applied this retrospectively, restating prior periods to reflect this change. This led to a reduction in total stock-based compensation expense reported for Q2 2005 compared to Q2 2004, primarily due to changes in equity programs, the employee stock purchase plan becoming non-compensatory, and forfeitures from workforce reductions.

IBM's management indicated that the completed divestiture of the Personal Computing business and the implemented restructuring actions are expected to improve operational efficiency, strengthen client-facing capabilities, and create a more competitive cost structure. The company reiterated its longer-term commitment to delivering double-digit earnings per share growth, driven by innovation and strategic investments. The significant increase in Global Services signings and the continued strength in Software revenue suggest positive underlying business momentum.