10-QPeriod: Q3 FY2005

INTERNATIONAL BUSINESS MACHINES CORP Quarterly Report for Q3 Ended Sep 30, 2005

Filed October 25, 2005For Securities:IBM

Summary

IBM's third quarter and nine-month 2005 report shows a decline in overall revenue, primarily due to the divestiture of the Personal Computing Division (PCD) to Lenovo. However, excluding the PCD, revenue saw a notable increase, driven by strong performance in Global Services and Software segments. The company also experienced a significant increase in its effective tax rate due to a one-time tax charge related to repatriating foreign earnings under the American Jobs Creation Act of 2004. Despite revenue headwinds from the PCD sale, IBM demonstrated improved gross profit margins, benefiting from the higher-margin Software and Global Services segments and the removal of the lower-margin PCD. Significant one-time events impacted the quarter, including a large gain from the Microsoft settlement and restructuring charges. The company also announced an additional $4.0 billion share repurchase program, underscoring its commitment to returning capital to shareholders.

Key Highlights

  • 1Total revenue declined 7.8% for the third quarter and 2.8% for the first nine months, largely due to the sale of the Personal Computing business.
  • 2Excluding the Personal Computing business, revenue increased 4.3% in Q3 and 4.9% for the first nine months, indicating underlying business strength.
  • 3Global Services revenue grew 3.3% in Q3 and 5.2% year-to-date, with strong contributions from Business Consulting Services and increasing Strategic Outsourcing signings.
  • 4Software revenue increased 5.5% in Q3 and 6.1% year-to-date, driven by growth in middleware offerings like WebSphere and Information Management.
  • 5The company recorded a significant one-time tax charge of $525 million related to the repatriation of $9.5 billion in foreign earnings, leading to an elevated effective tax rate for the quarter.
  • 6IBM received a $775 million settlement payment from Microsoft related to antitrust claims.
  • 7The company announced a new $4.0 billion share repurchase authorization, demonstrating a continued focus on capital return to shareholders.

Frequently Asked Questions

The divestiture of the Personal Computing Division (PCD) to Lenovo significantly impacted IBM's reported revenue. For the third quarter of 2005, total revenue decreased by 7.8% and by 2.8% for the first nine months. However, when excluding the PCD's revenue, IBM's underlying business showed growth, with revenue increasing by 4.3% in the third quarter and 4.9% year-to-date, highlighting the resilience of its remaining segments.

The effective tax rate for the third quarter of 2005 increased significantly due to a one-time tax charge of $525 million. This charge was associated with IBM's decision to repatriate approximately $9.5 billion of foreign earnings under the American Jobs Creation Act of 2004. This repatriation was approved by the CEO and Board of Directors as part of a domestic reinvestment plan.

Excluding the PCD, IBM's Global Services segment showed robust growth, with revenue up 3.3% in the third quarter and 5.2% year-to-date. The Software segment also performed well, with revenue increasing by 5.5% in the third quarter and 6.1% year-to-date. These segments, along with improved margins from the divestiture, contributed to a stronger overall financial profile despite the headline revenue decline.

Several significant one-time events impacted this quarter's results. These include a substantial $775 million settlement payment received from Microsoft related to antitrust claims, a $525 million tax charge for foreign earnings repatriation, and restructuring charges totaling $1.8 billion announced in the second quarter, with $1.8 billion recorded cumulatively by the end of Q3. The company also completed the divestiture of its Personal Computing business, which resulted in a net pre-tax gain.