Excerpts from analysis of IBM 1Q06 business results (Apr 19, 2006)

Annex Bulletin 2006-15 April 19, 2006

Excerpts from CONFIDENTIAL client edition

IBM FINANCIAL

Updated 4/19/06, 9:00AM PDT; updates Outlook

Analysis of IBM First Quarter Business Results

On the Button!

Big Blue's First Quarter Blues Are a Thing of the Past ; Revenues, Profits Hit the Mark This Year

SCOTTSDALE, Apr 19 - Big Blue's first quarter blues are a thing of the past. By contrast to a disappointing quarter a year ago (see "Slammed and Dunked," Apr 2005), IBM's first quarter 2006 results were on the button. Revenues hit the mark while profits exceeded Wall Street expectations. Some parts of the business emboldened investors, others left them cold. But overall, it was a solid quarter, yet another step forward in IBM's slow but steady turnaround march.

"We are beginning to see the expected turnaround in our services business, driven by long-term signings growth over the past four quarters," IBM CFO Mark Loughridge said in a post-release teleconference. "We see good opportunities there over the long term."

Investors and traders agreed. After having bid up the IBM stock by more than two points in advance of its first quarter earnings release on Apr 18, they tacked on another $1 in after-hours trading.

IBM net earnings were up 22% to $1.71 billion in the first quarter, or $1.08 per share, on revenue of $20.7 billion. Wall Street consensus estimates were for earnings of $1.05 a share and $20.7 billion in revenue, according to Thomson Financial.

[snip]

Business Segment Analysis

IBM Global Services unit reported a 1% drop in revenue, though IBM said it would have been a 3% gain in constant currency. IGS signed $11.4 billion in new services contracts in the quarter, up 14% from $10.0 billion a year ago. Since new bookings portend future revenues and earnings, this bodes well for IGS in the second half of the year.

IGS' profit margin gain of 2.3 percentage points, to 26.6%, was another encouraging indicator.

In Big Blue's two other major units, hardware and software revenue each rose 6% if the sold-off PC business and currency fluctuations were excluded. IBM's best hardware results came in some of its lowest-margin segments, including Microelectronics and lower-end servers.

IBM's gross profit margin was 39.1%, up more than three points from the same quarter last year. Excluding the divested PC business, gross margin was up half of a point.

[snip]

Business Outlook

Samuel J. Palmisano, IBM chairman and chief executive officer, said that "IBM had a good quarter with excellent earnings-per-share results. We continued to improve our profit performance with our strategic focus on higher-value segments of the marketplace, as well as with our emphasis on productivity and global integration."

For the next, or current, quarter, Thomson First Call analysts predict, on average, that Big Blue will make $1.28 a share on sales of $22.05 billion.

[snip]

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Volume XXII, Annex Newsflash 2006-15
April 19, 2006

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