IBM Announces Third-Quarter 2001 Results

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ARMONK, N.Y. - 16 Oct 2001: IBM today announced third-quarter 2001 diluted earnings per common share of $.90, a 17 percent decrease compared with diluted earnings per common share of $1.08 in the third quarter of 2000. Third-quarter 2001 net income was $1.6 billion, a 19 percent decline from $2.0 billion in the year-earlier period. IBM's third-quarter 2001 revenues totaled $20.4 billion, down 6 percent (3 percent at constant currency) compared with the third quarter of 2000.

Louis V. Gerstner, Jr., IBM chairman and chief executive officer, said: ``The third quarter saw an acceleration of the fundamental shift in customer buying behavior that is altering our industry's landscape. Customers now allocate an increasing percentage of their spending to solutions, not boxes. The major beneficiary of this change, of course, has been IBM Global Services. Another very important beneficiary, however, has been IBM's middleware software, since many of the major software solutions providers now recommend IBM middleware as their preferred platform.

``Finally, and perhaps surprising to some, another major beneficiary of the industry shift has been IBM's powerful high-end zSeries servers, as customers all over the world see the value of server consolidation. In the third quarter, zSeries MIPS grew 42 percent and have grown by more than 40 percent in each quarter of 2001.

``Turning to our individual units, Services continued its double- digit growth, excluding maintenance, and the backlog increased by nearly $2 billion from last quarter. Software had an outstanding quarter and we are increasing share in every important area of our software portfolio. Servers also had a strong quarter with major share gains in the UNIX market. The PC segment of our industry remains in trouble, and this negatively affected our PC and hard disk drive businesses. As expected, our Microelectronics business was weak,'' Mr. Gerstner said.

``IBM's results for the first nine months of this year include $63 billion of revenue, $5.4 billion of net profit -- both even with last year -- and $2.2 billion of free cash flow, double last year's amount. This is a remarkable record, given that many technology companies have been reporting huge revenue declines and vastly lower profits or losses for the first time in many years. IBM's balance sheet remains among the strongest in the technology industry or any industry.''

In the Americas, third-quarter revenues were $9.1 billion, a decline of 6 percent (5 percent at constant currency) from the same period of 2000. Revenues from Europe/Middle East/Africa were $5.7 billion, up 1 percent (4 percent at constant currency). Asia-Pacific revenues fell 5 percent (up 5 percent at constant currency) to $4.1 billion. OEM revenues decreased 28 percent (27 percent at constant currency) to $1.5 billion.

Revenues from Global Services, including maintenance, grew 5 percent (9 percent at constant currency) in the third quarter to $8.7 billion. Global Services revenues, excluding maintenance, increased 7 percent (11 percent at constant currency). IBM signed $10 billion in services contracts and concluded the quarter with a total services contract backlog of approximately $97 billion. The overall gross profit margin in Global Services improved by 1.8 points year over year to 28.4 percent.

Hardware revenues declined 21 percent (18 percent at constant currency) to $7.5 billion from the 2000 third quarter. Revenues from z900 mainframe servers grew strongly. Revenues from the iSeries mid- market servers increased in all geographic areas, while pSeries revenues declined in part because customers were awaiting the new high- end ``Regatta'' servers, which were announced in early October. Personal computer revenues fell significantly, reflecting continued weakness and price pressures in this market. Revenues from IBM's high- end storage product family - - known as ``Shark'' - - increased year over year. Microelectronics revenues decreased substantially, as expected, principally due to the cyclical downturn that is affecting the worldwide semiconductor and OEM markets.

Software revenues grew 10 percent (14 percent in constant currency) to $3.2 billion compared to the prior year's third quarter. Middleware revenues, which comprise approximately 80 percent of IBM's overall software revenues, grew 18 percent at constant currency and operating system revenues increased 3 percent year over year. WebSphere revenues increased 75 percent, MQ Series revenues more than doubled and DB2 revenues climbed 31 percent (excluding revenues from the acquisition of the Informix database business, which was successfully completed in the third quarter).

Global Financing revenues decreased 4 percent (2 percent at constant currency) in the third quarter to $822 million.

Revenues from the Enterprise Investments/Other area, which includes products for specialized customer uses, declined 24 percent (21 percent at constant currency) year over year to $244 million. This decline was expected, resulting from IBM's strategy to shift development and distribution of these products to third-party companies.

The company's total gross profit margin improved to 36.2 percent in the 2001 third quarter from 35.4 percent in the third quarter of 2000.

Total third-quarter expenses were $5.1 billion, up 5 percent compared with the year-earlier period. Selling, general and administrative expenses were flat and include a charge resulting from workforce-balancing actions. Research and development expenses also were flat. Other income declined primarily due to writedowns of certain equity investments. The company continues to focus on expense reductions through increased use of e-procurement, on-line learning and other actions related to IBM's ongoing e-business transformation.

IBM's tax rate in the third quarter was 29.5 percent compared with 30.0 percent in the third quarter of last year.

IBM spent approximately $1.8 billion on share repurchases in the third quarter. The average number of basic common shares outstanding in the quarter was 1.73 billion compared with 1.76 billion shares in the same period of 2000. There were 1.72 billion basic common shares outstanding at September 30, 2001.

Net income for the nine months ended September 30, 2001 was $5.4 billion, or $3.03 per diluted common share, compared with net income of $5.4 billion, or $2.97 per diluted common share, in the year- earlier period. Revenues for the nine months ended September 30, 2001 were $63.0 billion, flat (up 5 percent at constant currency) compared with $62.8 billion for the nine months of 2000.

The company's debt in support of operations, excluding global financing, increased $1.1 billion from year-end 2000 to $2.2 billion, reflecting the acquisition of the Informix database business. This resulted in a debt-to-capitalization ratio of 11 percent at September 30, 2001. Global financing debt declined $1.1 billion from year-end 2000 to a total of $26.4 billion, resulting in a debt-to-equity ratio of 6.7 to 1.

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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