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IBM benefits from soft touch

Vendor’s third quarter profits rocket by almost 50%

IBM’s quarterly net profits shot up 47% this month thanks to continued strong performance from its software division and rapid growth of its consulting arm.

Big Blue reported fiscal third quarter income of US$2.2 billion, compared with US$1.5 billion for the same period last year, and revenues of US$22.6 billion — an increase of 5% year-on-year.

“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,” stated Samuel Palmisano, IBM chairman, president and CEO.

The company’s success was again driven by its software division — by far its most profitable business — which reported pre-tax profits of US$1.3 billion for the third quarter ending September 30 on revenue of US$4.4 billion — up 8.5% year-on-year.

The software group’s income made up almost 40% of the vendor’s total reportable pre-tax profits.

Other divisions such as Global Technology Services and Systems and Technology posted much higher revenues, but together only made up 37.5% of total reportable pre-tax profits for the third quarter.

The results give an indication of why IBM has focused so much energy on its software business.

Spearheaded by Palmisano, IBM has bought 32 companies in just three years, including spending more than US$3.64 billion this summer on a host of software firms.

In August IBM snapped up network security firm Internet Security Systems (ISS) for around US$1.3 billion, content management software maker FileNet for US$1.6 billion, asset management software provider MRO Software for US$740million and privately held SOA vendor Webify Solutions for an undisclosed amount.

The results also reflect the success of IBM’s strategy in selling software and services that help companies integrate and manage disparate software in their IT environment — known as service-oriented architecture (SOA).

Revenues of IBM’s WebSphere SOA family of software products increased 30% during Q306 and sales from its Tivoli line of systems management software rose 44%.

Growth was also helped by the performance of its Global Business Services consulting group, which reported a 41% increase in pre-tax profits to US$405million on revenues of US$3.96 billion.

Sales from Global Services increased 3% to US$12 billion with IBM signing services contracts totalling US$10.5 billion in Q306.

The vendor, which beat analysts’ average growth forecast by 2.5%, has been tipped for another strong performance in the fourth quarter.

“We continue to believe that IBM has an opportunity for continued margin expansion going forward, particularly in software and services,” Sanford Bernstein analysts Toni Sacconaghi Jr, Eric Garfunkel and Shing Yin wrote in a research note following the announcement of the results.

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