In-Depth

IBM's Financial Results Vindicate On Demand Strategy

Big Blue posts strong year-over-year earnings and revenue gains

• By Stephen Swoyer
• 04/17/2003

In spite of its positive results, Big Blue narrowly missed analysts’ per-share earnings expectations.

IBM chief executive officer Sam Palmisano sought to portray his company’s upbeat quarter as a vindication of its On Demand computing strategy. “Our results demonstrate that our e-business on demand strategy … is responsive to the needs of our customers,” Palmisano said in a prepared release.

For Q1, which ended March 31st, IBM earned $1.4 billion from continuing operations—an 8% increase from the $1.3 billion that it earned during Q1 2002. First quarter revenues from continuing operations were $20.1 billion—an 11 percent increase from the $18 billion that it earned last year. During the same quarter last year, Big Blue’s revenues plunged by 12 percent.

IBM’s acquisition of PriceWaterhouseCoopers consulting appears to have born fruit, as its services-related revenue increased by 24 percent from the same period in 2002. Palmisano confirmed that IBM Global Services (IGS) experienced its second best-ever Q1 in 2003, in the midst of what he’d earlier described as an “ongoing difficult environment.” For the quarter, IGS signed new contracts totaling more than $12 billion, adding to an existing backlog of services-related contracts that total approximately $113 billion.

Software revenues represented another positive growth area for IBM, increasing by 8 percent (to $3.1 billion). IBM says that sales of its middleware products (including WebSphere Application Server and the DB2 database) were strong, as were WebSphere- and DB2-related revenues. While operating systems revenues posted gains, Tivoli- and Lotus-related revenues declined.

Services and software were strong in Q1 2003, but revenue from hardware sales dropped 1 percent. For the quarter, IBM said that revenue for its pSeries AIX and iSeries AS/400 servers grew while zSeries mainframe revenues were lower.

Big Blue attributed this setback to the likelihood of customers deferring IT purchasing decisions, along with anticipation among many customers for the introduction of IBM’s newest zSeries mainframe, code-named T-Rex, which is expected to ship late in the second quarter.

A similar trend appeared in late 2000, when customers deferred purchases of S/390 mainframe hardware in anticipation of IBM’s forthcoming 64-bit zSeries mainframes. The new T-Rex mainframes are expected to boast substantial performance enhancements over the current top-of-the-line z900 systems, including next-generation G8 processors and support for 64-way SMP.

As an interesting side note, IBM pointed out that even though mainframe revenues declined during Q1, total deliveries of zSeries MIPS increased by 3 percent during the same period.