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IBM Announces Second-Quarter 2000 Results

2Q00 EPS increased 16%, excluding 1999 items

ARMONK, N.Y. - 19 Jul 2000: IBM today announced second-quarter 2000 diluted earnings per common share of $1.06 compared with 1999 diluted earnings per common share of $1.28 (or $.91 per diluted share in 1999 after excluding the net benefit of $.37 per diluted share from the gain on the sale of the Global Network and other 1999 actions). Excluding these 1999 items, IBM's second-quarter 2000 diluted earnings per share increased 16 percent. Second-quarter 2000 net income totaled $1.9 billion compared with $2.4 billion in 1999 (or net income of $1.7 billion in 1999 after excluding the after-tax net benefit of $687 million from the gain on the Global Network sale and the other 1999 actions). Second-quarter 2000 revenues declined 1 percent (flat at constant currency) to $21.7 billion compared with the year-earlier period.

Louis V. Gerstner, Jr., IBM chairman and chief executive officer, said: "Our second-quarter results are right in line with our expectations and with the view we've been expressing since last October. Essentially, we've had three quarters of slow revenue growth, driven by a combination of the Y2K slowdown and a series of actions we've taken to improve our business portfolio. During that time, however, we have been able to produce satisfactory earnings growth.

"We exited the second quarter with a significant shift in momentum in several areas. Mid-way through the second quarter, for example, our services business re-ignited. New signings in the quarter totaled $20 billion -- a record quarter for IBM and what would have been a record year for many of our nearest competitors. Driven by our leadership position in e-business, a number of our product areas also experienced explosive growth, including eb management software, e-business consulting, Web hosting, systems integration and wireless chips. Importantly, we saw a firming of our server business, particularly Web servers -- which grew revenues nearly 30 percent. Our high-end disk drive revenues, led by our advanced Shark product, also grew 30 percent.

"In a portfolio of our breadth and size, we often have units in transition," Mr. Gerstner said. "Our hard disk drive business, while improving quarter to quarter, is still a drag on our revenue growth. PCs, as well, improved quarter to quarter, but we're not satisfied with the results. Nevertheless, our outlook going forward is quite different from the one we faced in the last three quarters, and we continue to be very encouraged about the second half of this year."

Second-quarter revenues from the Americas totaled $9.7 billion, a decrease of 3 percent (3 percent at constant currency) compared with the same period of last year. Revenues from Europe/Middle East/Africa were $5.9 billion, down 9 percent (flat at constant currency). Asia-Pacific revenues grew 20 percent (13 percent at constant currency) to $4.3 billion. OEM revenues totaled $1.8 billion, a 6 percent decrease (7 percent at constant currency) compared with the second quarter of 1999.

Hardware revenues were $9.2 billion in the second quarter, a decrease of 5 percent (4 percent at constant currency) compared with last year's second quarter. Web server revenues, led by advanced new high-end and mid-range models, grew strongly. System/390 and AS/400 server revenues declined, primarily due to year-over-year price reductions in the System/390 and a product transition in the AS/400 line. Personal computer revenues declined, partly as a result of parts shortages in certain product segments. Microelectronics revenues rose substantially in the quarter due to strong shipments of custom chips. Storage revenues declined, largely because of an ongoing transition in the company's hard disk drive product line.

Revenues from IBM Global Services, including maintenance, grew 2 percent (4 percent at constant currency) in the second quarter to $8.2 billion. Excluding maintenance, Global Services revenues increased 3 percent (4 percent at constant currency) to $6.9 billion. Revenue comparisons for IBM Global Services were adversely affected by the sale of the Global Network to AT&T in 1999 and by a year-over-year decline in Y2K services business. After adjusting for these factors, Global Services revenues (excluding maintenance) increased 10 percent. IBM concluded the quarter with a total services contract backlog of approximately $75 billion.

Software revenues increased 2 percent (5 percent at constant currency) in the second quarter to $3.2 billion. Revenues from the company's middleware products -- which are used for e-business -- grew strongly, especially in Web management and database software. During the quarter, IBM announced that it would invest more than $1 billion over the next several years to expand development, marketing and sales programs for its leading Web management product, WebSphere. Overall operating systems revenues declined in the quarter, primarily as a result of a decrease in AS/400 software revenues.

Revenues from Global Financing increased 10 percent (11 percent at constant currency) in the second quarter to $819 million.

Revenues from the Enterprise Investments/Other area, which includes custom hardware and software products for specialized customer uses, decreased 26 percent (25 percent at constant currency) year over year to $315 million.

The company's overall gross profit margin was 36.7 percent in the second quarter compared with 37.5 percent in the same period of 1999.

Second-quarter expenses were $5.2 billion and the expense-to-revenue ratio was 23.9 percent compared with 19.1 percent in the year earlier period (or 26.4 percent after excluding a 7.3-point improvement from the Global Network sale and the other 1999 actions).

IBM's tax rate in the second quarter was 30.0 percent compared with 40.8 percent in 1999 (or 30.0 percent after excluding 10.8 points due to the Global Network sale and the other 1999 actions).

IBM spent approximately $1.8 billion on common share repurchases in the second quarter. The average number of basic common shares outstanding in the quarter was 1,768 million compared with 1,812 million in the second quarter of 1999. There were 1,761 million basic common shares outstanding at June 30, 2000.

Debt in support of operations, excluding global financing, increased $932 million from year-end 1999 to $2.5 billion, resulting in a debt-to-capitalization ratio of 15 percent. Global financing debt declined $112 million from the end of 1999 to a total of $26.7 billion, resulting in a debt-to-equity ratio of 5.7 to 1.

Net income for the six months ended June 30, 2000 was $3.5 billion, or $1.89 per diluted common share, compared with net income in 1999 of $3.9 billion, or $2.05 per diluted common share (or $1.69 per diluted share and net income of $3.2 billion in 1999 after excluding the after-tax net benefit from the Global Network sale and the other 1999 actions). Revenues for the six months ended June 30, 2000 were $41.0 billion, a decrease of 3 percent (2 percent at constant currency) compared with $42.2 billion for the first six months of 1999.

Effective in the first quarter of this year, results reflect changes the company made in the organization of its business segments, including the transfer of the system-level product businesses from the Technology segment to the Enterprise Systems segment and the transfer of point-of-sale products from the Enterprise Investments segment to the Personal Systems segment. Also reflected are changes the company made in its expense allocation methodology, allocating expense items previously unallocated and enhancing shared expense allocation. Second-quarter and first-half 1999 results have been reclassified to conform with the 2000 presentation.

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, as discussed in the company's filings with the Securities and Exchange Commission.

Financial results attached

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Contact(s) information

Rob Wilson
IBM
914-499-6565

Carol Makovich
IBM
914-499-6212

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