10-QPeriod: Q1 FY2006

INTERNATIONAL BUSINESS MACHINES CORP Quarterly Report for Q1 Ended Mar 31, 2006

Filed April 25, 2006For Securities:IBM

Summary

International Business Machines Corporation (IBM) reported its first quarter 2006 financial results, showing a 9.8% year-over-year revenue decrease to $20.7 billion, primarily due to the divestiture of its Personal Computing business. However, excluding this divested segment, revenue saw a modest increase of 0.3% (4.0% adjusted for currency). Net income from continuing operations grew significantly by 21.4% to $1.7 billion, leading to a 27.1% increase in diluted earnings per share to $1.08. This performance reflects IBM's strategic shift towards higher-value market segments, improved productivity, and global integration, with notable strength in middleware software and Microelectronics. The company's gross profit margin improved by 3.1 percentage points to 39.1%, driven by the divestiture of the lower-margin Personal Computing business and productivity gains in Global Services. Total expenses also decreased, largely mirroring the revenue and gross profit trends. Despite a decline in cash and cash equivalents, influenced by pension contributions, acquisitions, and share repurchases, IBM's financial position remains robust, supported by a strong operating cash flow and a strategic focus on growth markets.

Key Highlights

  • 1Total revenue for Q1 2006 was $20.7 billion, a 9.8% decrease year-over-year, largely due to the divestiture of the Personal Computing business. Excluding this, revenue grew 0.3% (4.0% adjusted for currency).
  • 2Net income from continuing operations increased by 21.4% to $1.7 billion, and diluted earnings per share (EPS) from continuing operations rose 27.1% to $1.08.
  • 3Gross profit margin improved significantly by 3.1 percentage points to 39.1%, attributed to the divestiture of the Personal Computing business and productivity initiatives.
  • 4Global Services revenue saw a slight decrease of 1.2% (up 2.9% adjusted for currency), but Global Services signings increased 13% year-over-year, indicating future revenue potential.
  • 5Software revenue grew 2.4% (5.9% adjusted for currency), driven by strong performance in middleware products like WebSphere and Tivoli.
  • 6Hardware revenue increased 3.1% (5.6% adjusted for currency), with notable growth in Microelectronics and System x servers, though other server lines experienced declines.
  • 7The company repurchased $31 million shares of common stock in the quarter, demonstrating a commitment to returning value to shareholders.

Frequently Asked Questions

The primary driver of the reported 9.8% year-over-year revenue decline was the divestiture of IBM's Personal Computing business on April 30, 2005. The Q1 2006 results did not include any revenue from this segment, whereas the prior year's first quarter did. Excluding this divested business, IBM's revenue showed a slight increase of 0.3%.

IBM demonstrated strong profitability growth. Net income from continuing operations increased by 21.4% to $1.7 billion. Consequently, diluted earnings per share (EPS) from continuing operations rose by 27.1% to $1.08, indicating improved operational efficiency and strategic focus.

While Global Services revenue experienced a slight year-over-year decline of 1.2% (or grew 2.9% adjusted for currency), the segment's performance is showing positive signs for the future. Global Services signings increased by 13% year-over-year, reaching $11.4 billion, suggesting a healthy pipeline of future business. The company is focused on improving performance in its Integrated Technology Services and Global Business Services in Japan.

IBM completed four acquisitions in the first quarter of 2006 for an aggregate cost of $913 million. Notably, the acquisition of Micromuse significantly bolstered the Software segment. These acquisitions are part of IBM's strategy to enhance its product and service offerings and expand into high-growth markets. The acquisitions contributed to an increase in goodwill.