10-QPeriod: Q2 FY2006

INTERNATIONAL BUSINESS MACHINES CORP Quarterly Report for Q2 Ended Jun 30, 2006

Filed July 25, 2006For Securities:IBM

Summary

IBM's second quarter 2006 filing shows a slight decrease in total revenue compared to the prior year, primarily due to the divestiture of the Personal Computing business. Despite this, the company demonstrated strong earnings per share growth, driven by increased gross profit margins and effective cost management. Software and Microelectronics segments showed robust performance, while hardware experienced some challenges due to supply chain issues and product transitions. The company continues to execute on its strategy of portfolio integration and productivity initiatives to drive long-term shareholder value. The financial position remains solid, with a decrease in cash and equivalents due to share repurchases and pension funding, offset by increases in pension assets and goodwill. IBM is actively managing its debt and equity, demonstrating a commitment to shareholder returns through dividends and share buybacks. The company is also navigating various legal proceedings and regulatory investigations, which are disclosed but not currently anticipated to have a material adverse impact.

Key Highlights

  • 1Total revenue for the quarter decreased slightly by 1.7% to $21.89 billion, impacted by the divestiture of the Personal Computing business. Excluding this, revenue increased by 0.8%.
  • 2Income from continuing operations grew by 9.2% to $2.02 billion, and diluted EPS from continuing operations rose by 14.0% to $1.30.
  • 3Gross profit margin improved to 41.2% from 39.4% in the prior year, benefiting from the PC divestiture and productivity initiatives.
  • 4Software segment revenue increased by 4.5% to $4.24 billion, driven by growth in middleware and product lifecycle management software.
  • 5Hardware segment revenue declined by 7.4%, impacted by supply chain issues affecting server shipments and product transitions.
  • 6The company repurchased $31.7 million worth of common stock during the quarter.
  • 7Total Global Services signings were $9.6 billion, with a backlog of $109 billion at the end of the quarter.

Frequently Asked Questions

The divestiture of the Personal Computing business significantly impacts reported revenue. For the second quarter of 2006, total revenue decreased by 1.7% to $21.89 billion. However, excluding the divested PC business, IBM's revenue actually increased by 0.8%, indicating underlying growth in its ongoing operations.

IBM demonstrated strong expense management. Selling, general, and administrative expenses decreased by 24.3% primarily due to lower restructuring charges compared to the prior year and cost reductions from restructuring actions and the PC divestiture. Increased gross profit margins, driven by productivity initiatives and a more favorable business mix post-PC divestiture, also significantly contributed to the 9.2% increase in income from continuing operations.

The Software segment was a strong performer, with revenue up 4.5% driven by middleware and product lifecycle management. The Microelectronics business also saw significant revenue growth (45.4%). However, the Hardware segment experienced a revenue decline of 7.4% due to supply chain complexities affecting server shipments and ongoing product transitions. Global Services revenue saw a slight decrease, impacted by short-term business weakness, though Business Transformation Outsourcing showed strong growth.

IBM's strategy remains focused on leveraging its balanced portfolio of hardware, software, and services to deliver double-digit EPS growth. Key initiatives include driving innovation, investing in growth opportunities, focusing on productivity, and integrating solutions across its offerings. The company anticipates continued product refreshes in its Systems and Technology business and expects its Key Branded Middleware products to benefit from market trends like Services Oriented Architecture (SOA).