IBM Announces Second-Quarter 2001 Results

2Q01 EPS increased 8%

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ARMONK, N.Y. - 18 Jul 2001: IBM today announced second-quarter 2001 diluted earnings per common share of $1.15, an 8 percent increase compared with diluted earnings per common share of $1.06 in the second quarter of 2000. Second-quarter 2001 net income was $2.0 billion, a 5 percent increase from $1.9 billion in the year-earlier period. IBM's second-quarter 2001 revenuestotaled $21.6 billion, flat (up 5 percent at constant currency) compared with the second quarter of 2000.

Louis V. Gerstner, Jr., IBM chairman and chief executive officer, said: "In light of the extremely difficult industry conditions, as well as the dismal results posted by many IT companies, we're very pleased with our second-quarter results. While others stumbled, we grew revenue, recorded record operational profits and, most importantly, increased our market share in almost every one of our strategic business categories.

"Our services business continued its explosive growth, increasing its revenue by 15 percent, excluding maintenance, and signing $16 billion of new business. We increased share in the server segment for the third quarter in a row. Key software products like WebSphere and our leading database product, DB2, also outgrew their competitors and our Microelectronics Division continued its success in winning new design contracts with important OEM customers around the world. Finally, we generated an additional billion dollars in cash flow year over year and our debt decreased by approximately $2 billion from last year.

"We also were not immune from some of the problems that affected many of our competitors in the second quarter. We saw ongoing weakness in PCs and hard disk drives and we continued to be hurt by the negative effects of currency translations. We expect that these factors will continue to work against us in the second half of this year. Additionally, we are now seeing signs of slowing in our Microelectronics business as our OEM customers reduce purchases.

"Beyond these near-term issues," Mr. Gerstner said, "it is important to understand that IBM's market share gains result from the strategic decisions we made years ago and from our technological leadership in both hardware and software. Some pundits in the industry seem to think that the piece-part makers who fared so well during the dot-com mania will return to leadership simply because the economy will turn around. Nothing could be further from the truth. The short-term, cyclical problems of the industry are totally unrelated to the fundamental shift in customer buying behavior that foretells an industry driven by services, built on an infrastructure dominated by powerful, secure servers, with application integration provided by middleware software. We believe we are uniquely positioned to lead in this new environment, regardless of economic conditions."

In the Americas, second-quarter revenues were $9.6 billion, a decrease of 1 percent (flat at constant currency) from the 2000 period. Revenues from Europe/Middle East/Africa were $5.8 billion, down 1 percent (up 7 percent at constant currency). Asia-Pacific revenues declined 2 percent (up 10 percent at constant currency) to $4.3 billion. OEM revenues increased 11 percent (12 percent at constant currency) to $1.9 billion compared with the second quarter of 2000.

Revenues from IBM Global Services, including maintenance, grew 7 percent (13 percent at constant currency) in the second quarter to $8.7 billion. Global Services revenues, excluding maintenance, increased 9 percent (15 percent at constant currency). Revenues from e-business services increased nearly 30 percent. IBM signed $16 billion in services contracts and concluded the quarter with a total services contract backlog of approximately $95 billion.

Hardware revenues decreased 5 percent (1 percent at constant currency) to $8.7 billion from the second quarter of 2000. Revenues for zSeries mainframes grew strongly, and mainframe computing shipments grew in excess of 40 percent, as measured in MIPS (millions of instructions per second). Revenues for the pSeries Unix servers and iSeries mid-market servers declined in as-reported terms but grew in constant currency; revenues increased strongly for high-end enterprise pSeries models while iSeries revenues were up substantially in Europe. Personal computer revenues declined, reflecting industry weakness in this area. Storage revenues increased significantly, led by more than 50 percent growth in Shark. Hard disk drive revenues declined due to price pressures and weakness in the PC industry. Microelectronics revenues increased year over year.

Software revenues decreased 5 percent (flat at constant currency) to $3.0 billion compared to the second quarter of 2000. IBM's key distributed middleware products, WebSphere and DB2, grew strongly, while Tivoli revenues declined as a result of continuing transitions in this unit's product line. Tivoli's decline adversely affected IBM software revenues by approximately five points of growth. IBM signed 13 new alliances with independent software vendors during the quarter; these ISVs have committed to lead with IBM services, servers and middleware in helping customers build applications.

Global Financing revenues increased 3 percent (7 percent at constant currency) in the second quarter to $845 million.

Revenues from the Enterprise Investments/Other area, which includes custom hardware and software products for specialized customer uses, declined 7 percent (flat at constant currency) year over year to $293 million. These results are consistent with IBM's strategy to increasingly work with third-party companies in the development and distribution of these products.

The company's total gross profi t margin improved to 37.3 percent in the 2001 second quarter from 36.3 percent in the 2000 second quarter.

Second-quarter expenses were $5.1 billion. The total expense-to-revenue ratio was 23.8 percent compared with 23.5 percent in the year-earlier period. Operating expense and interest expense-to-revenue improved, while other income declined due to writedowns of certain equity investments. The company also continued to reduce its expenses 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 second quarter was 29.5 percent compared with 30.0 percent in the second quarter of last year.

IBM spent approximately $1.2 billion on share repurchases in the second quarter. The average number of basic common shares outstanding in the quarter was 1.74 billion compared with 1.77 billion shares in the same period of 2000. There were 1.74 billion basic common shares outstanding at June 30, 2001.

The company's debt in support of operations, excluding global financing, increased $134 million from year-end 2000 to $1.2 billion, resulting in a debt-to-capitalization ratio of 6 percent at the end of the second quarter 2001. Global Financing debt declined $1.4 billion from year-end 2000 to a total of $26.1 billion, resulting in a debt-to-equity ratio of 6.7 to 1.

Net income for the six months ended June 30, 2001 was $3.8 billion, or $2.13 per diluted common share, compared with net income of $3.5 billion, or $1.89 per diluted common share, in the year-earlier period. Revenues for the six months ended June 30, 2001 were $42.6 billion, an increase of 4 percent (9 percent at constant currency) compared with $41.0 billion for the first six months of 2000.

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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