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Services drive IBM Q3 profit up

IBM reported a 6 percent increase in profit for its fiscal third quarter as a strong performance from its services business offset a slide in hardware revenue.

IBM reported profit of US$2.36 billion, or $1.68 per share, compared to earnings of $2.22 billion or $1.45 in the year-ago quarter. Total revenue for the quarter was $24.1 billion, a 7 percent increase from last year when the company reported 22.6 billion. IBM beat consensus analyst earnings estimates from Thomson Financial but not revenue expectations; analysts had expected the company to earn $1.67 per share on revenue of 24.1 billion.

Double-digit revenue growth in both Global Business Services (GBS), up 16 percent, and Global Technology Services (GTS), up 13 percent, gave total revenue a boost despite a decline in IBM's hardware business for the quarter. Combined services revenue was $13.7 billion, up 14 percent year over year. However, revenue for the Systems and Technology segment was down 10.4 percent, with revenue of $4.9 billion compared to $5.47 billion last year.

"This was a very good quarter for services," said Mark Loughridge, senior vice president and chief financial officer, during a conference call Tuesday. He cited operational improvements across its services sectors, such as restructuring to improve regional performance in GBS and an effort to boost margins in GTS, as reasons for the segment's strong showing.

On the call, Loughridge also addressed the lackluster performance in Systems and Technology, the home of IBM's hardware business. "We were disappointed in the third (quarter) and we know we can do better in the fourth," he said of the segment's 10 percent decline.

Loughridge attributed part of that decline to IBM's divestiture of its printing business earlier this year. In January, IBM announced it was creating a joint printing business with Ricoh Co. called InfoPrint Solutions Co., a move that will eventually result IBM exiting the printing business in about three years.

IBM's hardware also suffered from transition in the company's System x server business, which is waiting for the fourth-quarter release of quad-core processors from Intel Corp. and Advanced Micro Devices Inc, he said. IBM also will release a new BladeCenter product to boost that server line in the fourth quarter.

Furthermore, IBM's System z business, which had the steepest revenue decline of the segment at 31 percent, had two strikes against it in the quarter, Loughridge said. The business didn't close a number of large deals it expected to close in September. Moreover, it was following a strong third-quarter performance -- 23 percent revenue growth -- for the same period last year.

Loughridge also noted that until the third quarter, the System z business had eight quarters of sustained growth.

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