IBM Reports 2007 Third-Quarter Results

ARMONK, NY :

* Diluted earnings of $1.68 per share, up 16 percent as reported;
* Total revenues of $24.1 billion, up 7 percent;
* Global Business Services revenues up 16 percent; pre-tax income up 29 percent;
* Global Technology Services revenues up 13 percent; pre-tax income up 26 percent;
* Highest overall Global Services revenue growth in four years.

IBM (NYSE: IBM) today announced third-quarter 2007 diluted earnings of $1.68 per share from continuing operations compared with diluted earnings of $1.45 per share in the third quarter of 2006, an increase of 16 percent as reported. Third- quarter income from continuing operations was $2.4 billion compared with $2.2 billion in the third quarter of 2006, an increase of 6 percent. Total revenues for the third quarter of 2007 of $24.1 billion increased 7 percent (3 percent, adjusting for currency) from the third quarter of 2006.

“Our outstanding services results this quarter enabled us to stay on track toward our objective of accelerated earnings per share growth through 2010, while we work through a transition in our hardware business,” said Samuel J. Palmisano, IBM chairman, president and chief executive officer. “Our year-to-date performance underscores the strength of major elements of our long-term roadmap, including revenue growth, margin expansion, and continued success in emerging market countries and in the integration of our acquisitions.”

From a geographic perspective, the Americas’ third-quarter revenues were $10.2 billion, an increase of 4 percent as reported (3 percent, adjusting for currency) from the 2006 period. Revenues from Europe/Middle East/Africa were $8.1 billion, up 11 percent (4 percent, adjusting for currency). Asia-Pacific revenues increased 9 percent (6 percent, adjusting for currency) to $4.9 billion. OEM revenues were $890 million, down 12 percent compared with the 2006 third quarter.

Total Global Services revenues grew 14 percent (10 percent, adjusting for currency) -- the highest growth since third quarter of 2003 -- with strong performance in all geographic regions and business sectors. Global Business Services segment revenues, marked by significant growth in core consulting and application management services, increased 16 percent (12 percent, adjusting for currency) to $4.6 billion. Global Technology Services segment revenues increased 13 percent (9 percent, adjusting for currency) to $9.1 billion, benefiting from sales of new business to existing clients. IBM signed services contracts totaling $11.8 billion, up 12 percent year over year, and ended the third quarter with an estimated services backlog, including Strategic Outsourcing, Business Transformation Outsourcing, Integrated Technology Services, Global Business Services and Maintenance, of $116 billion, an increase of $7 billion year to year.

Revenues from the Systems and Technology segment totaled $4.9 billion for the quarter, down 10 percent (13 percent, adjusting for currency). Revenues decreased 6 percent excluding the year-to-year impact of the Printing System Division divestiture in June 2007. Systems and Technology revenues from the System p UNIX server products increased 6 percent compared with the 2006 period and revenues from the System x servers increased 6 percent. Faced with a difficult comparison, revenues from System z server products decreased 31 percent versus the year-ago period. Total delivery of System z computing power, which is measured in MIPS (millions of instructions per second), decreased 21 percent. Revenues from the System i servers decreased 21 percent. Revenues from System Storage increased 1 percent and revenues from Microelectronics decreased 15 percent.

Revenues from the Software segment were $4.7 billion, an increase of 7 percent (3 percent, adjusting for currency) compared with the third quarter of 2006. Revenues from IBM’s middleware products, which primarily include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.6 billion, up 6 percent versus the third quarter of 2006. Operating systems revenues of $564 million increased 2 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 10 percent. Revenues for Information Management software, which enables clients to leverage information on demand, increased 9 percent. Revenues from Tivoli software, infrastructure software that enables clients to centrally manage networks including security and storage capability, increased 5 percent, and revenues for Lotus software, which allows collaborating and messaging by clients in real-time communication and knowledge management, increased 9 percent year over year. Revenues from Rational software, integrated tools to improve the processes of software development, increased 3 percent compared with the year-ago quarter.

Global Financing segment revenues increased 6 percent (2 percent, adjusting for currency) in the third quarter to $623 million.

The company’s total gross profit margin was 41.3 percent in the 2007 third quarter compared with 42.0 percent in the 2006 period.

Total expense and other income increased 6 percent to $6.7 billion compared to $6.3 billion in the prior-year period. SG&A expense increased 4 percent to $5.3 billion. RD&E expense decreased 1 percent to $1.5 billion compared with the year-ago period. Intellectual property and custom development income increased to $270 million compared with $242 million a year ago. Other (income) and expense contributed income of $95 million in the third quarter of 2007 versus income of $174 million in the third quarter of 2006. Interest expense increased to $193 million compared with $70 million in the prior-year period, primarily due to the increase in debt to finance the company’s accelerated share repurchase agreements executed in the prior quarter.

IBM’s effective tax rate in the third-quarter 2007 was 28.0 percent compared with 30.0 percent in the third quarter of 2006.

The weighted-average number of diluted common shares outstanding in the third-quarter 2007 was 1.41 billion compared with 1.53 billion shares in the same period of 2006. As of September 30, 2007, there were 1.38 billion basic common shares outstanding.

Debt, including Global Financing, totaled $35.3 billion, compared with $22.7 billion at year-end 2006. From a management segment view, Global Financing debt increased $1.5 billion from year-end 2006 to a total of $23.8 billion, resulting in a debt-to-equity ratio of 6.8 to 1. The non-global financing debt-to-capitalization ratio was 40.3 percent at the end of September 30, 2007 compared with 46.7 percent at the end of the second quarter, which reflects increased financial leverage associated with the accelerated share repurchase agreements. The cash balance was $13.8 billion at the end of the third quarter.

Year-To-Date 2007 Results
Income from continuing operations for the nine months ended September 30, 2007 was $6.5 billion compared with $6.0 billion in the year-ago period. Diluted earnings per share from continuing operations were $4.42 compared with $3.81 per diluted share for the 2006 period. Revenues from continuing operations for the nine-month period totaled $69.9 billion, an increase of 7 percent (4 percent, adjusting for currency) compared with $65.2 billion for the nine months of 2006.

Forward-Looking and Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in this release may constitute forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the company’s failure to continue to develop and market new and innovative products and services and to keep pace with technological change; competitive pressures; failure to obtain or protect intellectual property rights; fluctuations in revenues and purchases, and volatility of stock prices; the company’s ability to attract and retain key personnel; adverse affects from tax matters; environmental matters; currency fluctuations and customer financing risks; customer credit risk on trade receivables; risks from investing in growth opportunities; the company’s failure to maintain the adequacy of its internal controls; the company’s use of certain estimates and assumptions; dependence on certain suppliers; changes in the financial or business condition of the company’s distributors or resellers; the company’s ability to successfully manage acquisitions and alliances; failure to have sufficient insurance; legal, political, health and economic conditions; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Q, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein by reference. The company assumes no obligation to update or revise any forward-looking statements.

Presentation of Information in this Press Release
In an effort to provide investors with additional information regarding the company’s results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release the following non-GAAP information which management believes provides useful information to investors:

IBM Results -

* adjusting for revenues from the Printing System Division divestiture;
* adjusting for currency (i.e., at constant currency).

The rationale for management’s use of non-GAAP measures is included as part of the supplementary materials presented within the third-quarter earnings materials. These materials are available on the IBM investor relations Web site at www.ibm.com/investor and are being included in Attachment II (“Non-GAAP Supplementary Materials”) to the Form 8-K that includes this press release and is being submitted today to the SEC.