INTERCONNECTS

IBM has announced second-quarter 2008 diluted earnings of $1.98 per share from continuing operations, an increase of 28 percent as reported, compared with diluted earnings of $1.55 per share, including a 5 cents per share gain from the sale of the Printing Systems Division (PSD), in the second quarter of 2007. Excluding the gain in the prior-year period, diluted earnings for the second-quarter 2008 increased 32 percent year over year. Second-quarter income from continuing operations was $2.8 billion, an increase of 22 percent, compared with $2.3 billion, including the gain from the sale of PSD, in the second quarter of 2007. Without the gain, income from continuing operations increased 26 percent versus the comparable period last year. Total revenues for the second quarter of 2008 of $26.8 billion increased 13 percent (6 percent, adjusting for currency) from the second quarter of 2007. "IBM had an outstanding quarter and a strong first half for 2008. These results demonstrate that IBM has the ability to thrive in both emerging and established markets. Once again, IBMers performed very well around the world," said Samuel J. Palmisano, IBM chairman, president and chief executive officer. "We are continuing to see the benefits of IBM's transformation in recent years. Today IBM is a company with a distinctive business model that gives us a competitive edge in a global economy. We enjoy a steady base of recurring revenue and profits; a truly global reach and scale; services and products that deliver genuine value to clients wherever they do business; and a strong and flexible financial foundation that generates powerful cash flow and fuels our investment in growth opportunities. "We feel good about our full-year outlook and our 2010 roadmap for $10 to $11 of earnings per share." From a geographic perspective, the Americas' second-quarter revenues were $10.9 billion, an increase of 8 percent as reported (6 percent, adjusting for currency) from the 2007 period. Revenues from Europe/Middle East/Africa were $9.8 billion, up 20 percent (7 percent, adjusting for currency). Asia-Pacific revenues increased 16 percent (6 percent, adjusting for currency) to $5.3 billion. OEM revenues were $706 million, down 17 percent compared with the 2007 second quarter. Revenues from the company's new growth markets organization increased 21 percent (14 percent, adjusting for currency) and represented 18 percent of geographic revenues. Total Global Services revenues grew 16 percent (8 percent, adjusting for currency). Global Technology Services segment revenues increased 15 percent (8 percent, adjusting for currency) to $10.1 billion, with significant growth from existing clients. Global Business Services segment revenues, which benefited from strength in consulting services, increased 18 percent (9 percent, adjusting for currency) to $5.1 billion. IBM signed services contracts totaling $14.7 billion, at actual rates, up 12 percent ($12.2 billion, adjusting for currency, up 4 percent). Short-term signings increased 18 percent, at actual rates, to $7.0 billion (up 9 percent to $5.8 billion, adjusting for currency). The company ended the second quarter with an estimated services backlog, including Strategic Outsourcing, Business Transformation Outsourcing, Integrated Technology Services, Global Business Services and Maintenance, of $117 billion, adjusting for currency, an increase of approximately $1 billion year over year. Revenues from the Systems and Technology segment totaled $5.2 billion for the quarter, up 2 percent (down 3 percent, adjusting for currency). Revenues increased 5 percent (flat, adjusting for currency) excluding the year-to-year impact of the PSD divestiture in June 2007. Systems revenues grew 10 percent (4 percent, adjusting for currency). Revenues from System z mainframe server products increased 32 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 34 percent. Revenue from the converged System p server products increased 29 percent compared with the 2007 period. Revenues from the System x servers decreased 5 percent, and revenues from the System i servers decreased 47 percent. Revenues from System Storage increased 12 percent and revenues from Retail Store Solutions were flat. Revenues from Microelectronics OEM decreased 19 percent. Revenues from the Software segment were $5.6 billion, an increase of 17 percent (9 percent, adjusting for currency) compared with the second quarter of 2007. Revenues from IBM's total middleware products, which primarily include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $4.3 billion, up 17 percent versus the second quarter of 2007. Operating systems revenues of $592 million increased 4 percent compared with the prior-year quarter. 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 9 percent. Revenues for Information Management software, which enables clients to leverage information on demand, increased 30 percent. Revenues from Tivoli software, infrastructure software that enables clients to centrally manage networks including security and storage capability, increased 9 percent, and revenues for Lotus software, which allows collaborating and messaging by clients in real-time communication and knowledge management, increased 21 percent year over year. Revenues from Rational software, integrated tools to improve the processes of software development, increased 37 percent compared with the year-ago quarter. Global Financing segment revenues increased 6 percent (down 2 percent, adjusting for currency) in the second quarter to $634 million. The company's total gross profit margin was 43.2 percent in the 2008 second quarter compared with 41.8 percent in the 2007 period. Total expense and other income increased 15 percent to $7.8 billion compared with the prior-year period. SG&A expense increased 12 percent to $6.3 billion. RD&E expense increased 8 percent compared with the year-ago period. Intellectual property and custom development income increased to $285 million compared with $246 million a year ago. Other (income) and expense was income of $24 million, down $228 million as a result of hedging and the year-to-year impact of the gain on the sale of PSD in the second quarter of 2007. Interest expense increased to $145 million compared with $130 million, primarily due to the increase in debt to finance the company's accelerated share repurchase agreements. IBM's effective tax rate in the second-quarter 2008 was 27.5 percent compared with 28.0 percent in the second quarter of 2007. Shares repurchased in the second quarter were approximately $4.7 billion on a cash-paid basis. The weighted-average number of diluted common shares outstanding in the second-quarter 2008 was 1.40 billion compared with 1.46 billion shares in the same period of 2007. As of June 30, 2008, there were 1.35 billion basic common shares outstanding. Debt, including Global Financing, totaled $34.2 billion, compared with $35.3 billion at year-end 2007. From a management segment view, Global Financing debt increased $639 million from year-end 2007 to a total of $25.2 billion at June 30, 2008, resulting in a debt-to-equity ratio of 6.8 to 1. Non-global financing debt, which reflects financial leverage associated with accelerated share repurchase agreements, totaled $9.1 billion, a decrease of $1.7 billion since year-end 2007, resulting in a debt-to-capitalization ratio of 26.9 percent from 30.0 percent at year-end 2007. The cash balance was $9.8 billion at the end of the second quarter. Year-To-Date 2008 Results Income from continuing operations for the six months ended June 30, 2008 was $5.1 billion, an increase of 24 percent, compared with $4.1 billion, including the gain from the sale of PSD, in the year-ago period. Diluted earnings per share from continuing operations increased 32 percent to $3.63, compared with $2.75 per diluted share, including the gain from the sale of PSD, for the 2007 period. Without the gain, income from continuing operations for the six months ended June 30, 2008 increased 26 percent and diluted earnings per share increased 34 percent. Revenues from continuing operations for the six- month period totaled $51.3 billion, an increase of 12 percent (5 percent, adjusting for currency) compared with $45.8 billion for the six months of 2008.