IBM Reports 2006 Third-Quarter Results

18/10/2006 - 11:28

IBM (NYSE: IBM) today announced third-quarter 2006 diluted
earnings of $1.45 per share from continuing operations, an increase of
54 percent as reported, compared with diluted earnings of $.94 per
share in the third quarter of 2005; the third-quarter 2005 diluted
earnings include $.32 per share for a one-time charge of $525 million
for taxes in connection with the 2005 repatriation of foreign
earnings. Diluted earnings per share for the third-quarter 2006 grew
15 percent compared with the year-ago quarter of $1.26 per diluted
share, without the one-time per share charge.

Third-quarter income from continuing operations was $2.2 billion
compared with $1.5 billion in the third quarter of 2005, including the
one- time charge, an increase of 47 percent. Income from continuing
operations for the third quarter grew 9 percent compared with the
third-quarter 2005 income from continued operations of $2.0 billion,
excluding the one-time charge. Total revenues for the third quarter of
2006 of $22.6 billion increased 5 percent (4 percent, adjusting for
currency) from the third quarter of 2005.

Samuel J. Palmisano, IBM chairman, president and chief executive
officer, said: "Our strong performance is the result of excellent
execution and the repositioning of IBM's business model to capture the
growth and profit areas of a rapidly changing IT industry."

From a geographic perspective, the Americas third-quarter revenues
were $9.8 billion, an increase of 3 percent as reported (2 percent,
adjusting for currency) from the 2005 period. Revenues from
Europe/Middle East/Africa were $7.3 billion, up 6 percent (2 percent,
adjusting for currency). Asia-Pacific revenues increased 4 percent (6
percent, adjusting for currency) to $4.5 billion. OEM revenues were
$1.0 billion, up 24 percent compared with the 2005 third quarter.

Revenues from Software were $4.4 billion, an increase of 9 percent
(7 percent, adjusting for currency) compared with the third quarter of
2005. Revenues from IBM's middleware brands, which include WebSphere,
Information Management, Tivoli, Lotus and Rational products, were $3.4
billion, up 12 percent versus the third quarter of 2005. Operating
systems revenues decreased 6 percent to $552 million compared with the
prior-year quarter. Revenues from other software and services
increased, which includes the Product Lifecycle Management portfolio
of products.

For the WebSphere family of software products, which facilitate
customers' ability to manage a wide variety of business processes
using open standards to interconnect applications, data and operating
systems, revenues increased 30 percent. Revenues for Information
Management software, which enables clients to leverage information on
demand, increased 12 percent. Revenues from Tivoli software,
infrastructure software that enables customers to centrally manage
networks including security and storage capability, increased 44
percent, and revenues for Lotus software, which allows collaborating
and messaging by customers in real-time communication and knowledge
management, increased 8 percent year over year. Revenues from Rational
software, integrated tools to improve the processes of software
development, increased 2 percent compared with the year-ago quarter.

Revenues from Global Services increased 3 percent (2 percent,
adjusting for currency) to $12.0 billion in the third quarter of 2006.
IBM signed services contracts totaling $10.5 billion and ended the
quarter with an estimated services backlog, including Strategic
Outsourcing, Business Transformation Outsourcing, Global Business
Services, Integrated Technology Services and Maintenance, of $109
billion.

Hardware revenues increased 9 percent (8 percent, adjusting for
currency) to $5.6 billion in the third-quarter 2006 compared to $5.1
billion in the year-ago period. Systems and Technology Group (S&TG)
revenues totaled $5.5 billion for the quarter, up 10 percent. S&TG
revenues from System z server products increased 25 percent compared
with the year-ago period. Total delivery of System z computing power,
which is measured in MIPS (millions of instructions per second),
increased 16 percent. Revenues from the System p UNIX server products
increased 10 percent compared with the 2005 period. Revenues from the
System x servers increased 4 percent, and revenues from the System i
servers decreased 22 percent. Revenues from Microelectronics increased
29 percent and revenues from System Storage increased 12 percent.

Global Financing revenues decreased 2 percent (3 percent,
adjusting for currency) in the third quarter to $591 million.

The company's total gross profit margin was 42.0 percent in the
2006 third quarter compared with 40.6 percent in the 2005 period.

Total expense and other income increased 8 percent to $6.3 billion
compared with the prior-year period. SG&A expense increased 11 percent
to $5.1 billion. RD&E expense increased 7 percent compared with the
year-ago period. Intellectual property and custom development income
increased to $242 million compared with $213 million a year ago. Other
(income) and expense was income of $174 million in the third quarter
of 2006 versus income of $99 million in the third quarter of 2005.

IBM's effective tax rate in the third-quarter 2006 was 30.0
percent, compared with 48.0 percent in the third quarter of 2005. The
tax rate decrease was substantially driven by the incremental tax
charge of $525 million in the third quarter of 2005 related to the
company's repatriation of foreign earnings.

Share repurchases totaled approximately $1.6 billion in the third
quarter. The weighted-average number of diluted common shares
outstanding in the third-quarter 2006 was 1.53 billion compared with
1.62 billion shares in the same period of 2005. As of September 30,
2006, there were 1.51 billion basic common shares outstanding.

IBM ended the third quarter of 2006 with $10.9 billion of cash on
hand. The balance sheet remains strong, and the company is well
positioned to take advantage of opportunities.

Debt, including Global Financing, totaled $22.0 billion, compared
with $22.6 billion at year-end 2005. From a management segment view,
the non-global financing debt-to-capitalization ratio was 2.3 percent
at the end of September 30, 2006, and Global Financing debt increased
$771 million from year-end 2005 to a total of $21.3 billion, resulting
in a debt-to-equity ratio of 6.9 to 1.

Year-To-Date 2006 Results

Income from continuing operations for the nine months ended
September 30, 2006 was $6.0 billion, compared with $4.8 billion in the
year-ago period, which includes a charge of $525 million for taxes in
connection with the 2005 repatriation of foreign earnings, and
non-recurring pretax items for incremental restructuring charges of
$1.7 billion, offset by the $1.1 billion gain on the sale of the
Personal Computing (PC) business, and the $775 million legal
settlement received from Microsoft. Diluted earnings per share from
continuing operations were $3.81 compared with $2.92 per diluted share
for the 2005 period. Revenues from continuing operations for the
nine-month period totaled $65.2 billion, a decrease of 2 percent as
reported and adjusting for currency compared with $66.7 billion for
the nine months of 2005, which includes PC revenues of $2.9 billion
for the first four months of 2005 only. Excluding the divested PC
business, revenues increased 2 percent (3 percent, adjusting for
currency) compared with the nine-month period of 2005.

For total operations, net income for the nine months of 2006 was
$6.0 billion, or $3.81 per diluted share, compared with the nine
months of 2005 net income of $4.7 billion, or $2.90 per diluted share,
which included a loss from discontinued operations of $27 million.

Forward-Looking and Cautionary Statements

Except for the historical information and discussions contained
herein, statements contained in this release may constitute
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements involve a
number of risks, uncertainties and other factors that could cause
actual results to differ materially, including the company's failure
to continue to develop and market new and innovative products and
services and to keep pace with technological change; competitive
pressures; failure to obtain or protect intellectual property rights;
quarterly fluctuations in revenues and volatility of stock prices; the
company's ability to attract and retain key personnel; adverse affects
from tax matters; currency fluctuations and customer financing risks;
customer credit risk on trade receivables; the company's failure to
maintain the adequacy of its internal controls; the company's use of
certain estimates and assumptions; dependence on certain suppliers;
changes in the financial or business condition of the company's
distributors or resellers; the company's ability to successfully
manage acquisitions and alliances; failure to have sufficient
insurance; legal, political, health and economic conditions; risk
factors related to IBM securities; and other risks, uncertainties and
factors discussed in the company's Form 10-Q, Form 10-K and in the
company's other filings with the U.S. Securities and Exchange
Commission (SEC) or in materials incorporated therein by reference.
The company assumes no obligation to update or revise any
forward-looking statements.

Presentation of Information in this Press Release

In an effort to provide investors with additional information
regarding the company's results as determined by generally accepted
accounting principles (GAAP), the company has also disclosed in this
press release the following non-GAAP information which management
believes provides useful information to investors:

IBM results:

-- without non-recurring items,

-- without divested PC business,

-- adjusting for currency (i.e., at constant currency).

The rationale for management's use of non-GAAP measures is
included as part of the supplementary materials presented within the
third-quarter earnings materials. These materials are available on the
IBM investor relations Web site at www.ibm.com/investor and are being
included in Attachment II ("Non-GAAP Supplementary Materials") to the
Form 8-K that includes this press release and is being submitted today
to the SEC.

Conference Call and Webcast

IBM's regular quarterly earnings conference call is scheduled to
begin at 4:30 p.m. EDT, today. Investors may participate by viewing
the Webcast at www.ibm.com/investor/3q06. Presentation charts will be
available on the Web site prior to the Webcast.

Financial Results Attached (amounts may not total due to rounding)

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INTERNATIONAL BUSINESS MACHINES CORPORATION
COMPARATIVE FINANCIAL RESULTS
(Unaudited; Dollars in millions except per share amounts)

Three Months Nine Months
Ended September 30, Ended September 30,

Percent Percent
2006 2005* Change 2006 2005* Change
------- ------- ------- ------- ------- -------
REVENUE

Global Services $12,017 $11,697 2.7% $35,478 $35,407 0.2%
Gross margin 27.8% 26.1% 27.4% 25.5%

Hardware 5,583 5,130 8.9% 15,306 17,445 -12.3%
Gross margin 37.7% 37.1% 35.1% 32.3%

Software 4,406 4,059 8.5% 12,554 11,930 5.2%
Gross margin 85.3% 84.9% 84.6% 84.4%

Global Financing 591 600 -1.5% 1,755 1,802 -2.6%
Gross margin 48.6% 54.5% 50.9% 53.7%

Other 20 43 -54.5% 74 123 -39.9%
Gross margin 8.1% 29.2% -9.1% 51.5%

TOTAL REVENUE 22,617 21,529 5.1% 65,166 66,707 -2.3%

GROSS PROFIT 9,492 8,738 8.6% 26,594 25,767 3.2%
Gross margin 42.0% 40.6% 40.8% 38.6%

EXPENSE AND OTHER INCOME

S,G&A 5,121 4,632 10.5% 14,639 16,062 -8.9%
% of revenue 22.6% 21.5% 22.5% 24.1%

R,D&E 1,543 1,447 6.6% 4,520 4,383 3.1%
% of revenue 6.8% 6.7% 6.9% 6.6%

Intellectual property
and custom development
income (242) (213) 13.2% (659) (720) -8.4%
Other (income)
and expense (174) (99) 75.9% (616) (1,788) -65.6%
Interest expense 70 56 24.0% 207 172 20.6%

TOTAL EXPENSE AND
OTHER INCOME 6,317 5,823 8.5% 18,091 18,109 -0.1%
% of revenue 27.9% 27.0% 27.8% 27.1%

INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES 3,174 2,915 8.9% 8,503 7,658 11.0%
Pre-tax margin 14.0% 13.5% 13.0% 11.5%

Provision for
income taxes 952 1,399 -32.0% 2,551 2,884 -11.6%
Effective tax
rate 30.0% 48.0% 30.0% 37.7%

INCOME FROM CONTINUING
OPERATIONS $2,222 $1,516 46.6% $5,952 $4,774 24.7%
Net margin 9.8% 7.0% 9.1% 7.2%

DISCONTINUED OPERATIONS
Loss from discontinued
operations (0) 0 (0) 27

NET INCOME $2,222 $1,516 46.5% $5,952 $4,747 25.4%
====== ====== ====== ======

EARNINGS/(LOSS)PER SHARE
OF COMMON STOCK:

ASSUMING DILUTION
CONTINUING
OPERATIONS $1.45 $0.94 54.3% $3.81 $2.92 30.5%
DISCONTINUED
OPERATIONS (0.00) 0.00 (0.00) (0.02)
----- ------ ------ ------
TOTAL $1.45 $0.94 54.3% $3.81 $2.90 31.4%
====== ====== ====== ======
BASIC
CONTINUING
OPERATIONS $1.47 $0.95 54.7% $3.87 $2.97 30.3%
DISCONTINUED
OPERATIONS (0.00) 0.00 (0.00) (0.02)
------ ------ ------ ------
TOTAL $1.47 $0.95 54.7% $3.87 $2.95 31.2%
====== ====== ====== ======

WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING (M's)
ASSUMING DILUTION 1,534.3 1,617.2 1,560.5 1,635.2
BASIC 1,513.2 1,591.3 1,538.6 1,607.9
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* The company filed a Form 8-K with the U.S. SEC on June 13, 2006 to
reclassify its historical financial statements and related footnotes
to reflect changes to its management system in the first quarter of
2006.
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INTERNATIONAL BUSINESS MACHINES CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)

At At
(Dollars in millions) September 30, December 31, Percent
2006 2005 Change
------------ ----------- -------
ASSETS

Cash, cash equivalents,
and marketable securities $10,900 $13,686 -20.4%

Receivables - net, inventories,
prepaid expenses 29,768 31,975 -6.9%

Plant, rental machines,
and other property - net 14,059 13,756 2.2%

Investments and other assets 49,428 46,331 6.7%
-------- --------

TOTAL ASSETS $104,155 $105,748 -1.5%
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Short-term debt $8,555 $7,216 18.6%
Long-term debt 13,436 15,425 -12.9%
-------- --------
Total debt 21,991 22,641 -2.9%

Accounts payable, taxes,
and accruals 26,374 27,936 -5.6%

Other liabilities 21,542 22,073 -2.4%
-------- --------
TOTAL LIABILITIES 69,907 72,650 -3.8%

STOCKHOLDERS' EQUITY 34,248 33,098 3.5%
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $104,155 $105,748 -1.5%
======== ========

INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)

THIRD QUARTER 2006
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) -------- Revenue --------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS

Global Technology
Services $8,058 $428 $8,486 $814 9.6%
% change 3.5% -18.8% 2.1% -6.4%

Global Business Services 3,959 337 4,295 405 9.4%
% change 1.2% 0.6% 1.2% 40.8%

Systems and Technology
Group 5,466 255 5,721 413 7.2%
% change 9.6% -5.0% 8.8% 13.1%

Software 4,406 559 4,965 1,302 26.2%
% change 8.5% 15.1% 9.2% 15.2%

Global Financing 587 337 924 335 36.2%
% change -2.1% 16.7% 4.0% -7.9%

Personal Computing
Division 0 0 0 0 0.0%

TOTAL REPORTABLE
SEGMENTS 22,476 1,916 24,391 3,268 13.4%
% change 5.3% 0.6% 4.9% 8.4%

Eliminations / Other 141 (1,916) (1,774) (94)

TOTAL IBM CONSOLIDATED $22,617 $0 $22,617 $3,174 14.0%
% change 5.1% 5.1% 8.9%

THIRD QUARTER 2005*
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) -------- Revenue --------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS

Global Technology
Services $7,787 $526 $8,313 $871 10.5%

Global Business Services 3,910 335 4,245 288 6.8%

Systems and Technology
Group 4,988 268 5,256 365 6.9%

Software 4,059 486 4,545 1,130 24.9%

Global Financing 599 289 888 363 40.9%

Personal Computing
Division 0 0 0 0 0.0%

TOTAL REPORTABLE
SEGMENTS 21,343 1,904 23,247 3,017 13.0%

Eliminations / Other 186 (1,904) (1,719) (101)

TOTAL IBM CONSOLIDATED $21,529 $0 $21,529 $2,915 13.5%
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* The company filed a Form 8-K with the U.S. SEC on June 13, 2006 to
reclassify its financial statements and related footnotes to reflect
changes to its management system effective as of the first quarter
of 2006, including the separation of the Global Services segment into
two new reportable segments: Global Technology Services and Global
Business Services, as well as the reclassification of Enterprise
Investments to other reportable segments.
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INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)

NINE MONTHS 2006
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) -------- Revenue --------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS

Global Technology
Services $23,732 $1,328 $25,061 $2,445 9.8%
% change 1.1% -18.8% -0.2% 61.5%

Global Business Services 11,746 1,023 12,769 1,168 9.1%
% change -1.5% -0.8% -1.5% 207.5%

Systems and Technology
Group 14,900 807 15,706 582 3.7%
% change 5.4% 5.7% 5.4% -13.7%

Software 12,554 1,616 14,170 3,478 24.5%
% change 5.2% 13.6% 6.1% 22.3%

Global Financing 1,744 1,039 2,784 1,068 38.4%
% change -3.0% 2.6% -1.0% -2.3%

Personal Computing
Division 0 0 0 0 nm
% change nm nm nm nm

TOTAL REPORTABLE
SEGMENTS 64,676 5,814 70,490 8,741 12.4%
% change -2.2% -1.5% -2.2% 37.9%

Eliminations / Other 491 (5,814) (5,323) (239)

TOTAL IBM CONSOLIDATED $65,166 $0 $65,166 $8,503 13.0%
% change -2.3% -2.3% 11.0%

NINE MONTHS 2005*
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) -------- Revenue --------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS

Global Technology
Services $23,481 $1,636 $25,117 $1,514 6.0%

Global Business Services 11,926 1,032 12,958 380 2.9%

Systems and Technology
Group 14,132 763 14,895 674 4.5%

Software 11,930 1,423 13,353 2,844 21.3%

Global Financing 1,798 1,013 2,811 1,092 38.8%

Personal Computing
Division 2,876 33 2,909 (165) nm

TOTAL REPORTABLE
SEGMENTS 66,143 5,899 72,042 6,340 8.8%

Eliminations / Other 565 (5,899) (5,335) 1,319

TOTAL IBM CONSOLIDATED $66,707 $0 $66,707 $7,658 11.5%
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nm - not meaningful
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