After losing Sun to Oracle, IBM reports lower Q1 results

Vendor says first-quarter revenue off 11% compared with last year; net income also down

On the same day that it appears to have lost out for good on the opportunity to buy Sun Microsystems Inc., IBM reported that its revenue in this year's first quarter dropped 11% compared with the same quarter last year and fell short of analyst expectations.

Total revenue for the quarter was $21.7 billion, compared with the average figure of $22.5 billion that analysts polled by Thomson Reuters had projected.

Net income fell 1% to $2.30 billion, down from $2.32 billion in last year's first quarter. But diluted earnings per share were $1.70, a 4% increase over the year-earlier level. The per-share figure beat Wall Street expectations of $1.66 per share.

On Monday, Oracle Corp. announced that it has agreed to buy Sun for $7.4 billion, or a net of $5.6 billion after taking into account Sun's cash holdings and debts.

The deal with Oracle followed reports, never confirmed, that IBM had made an offer for Sun that the latter company deemed to be too low. Buying Sun would put Oracle in more direct competition with IBM, since Oracle would have a similar business model that combines software and hardware offerings.

But Mark Loughridge, IBM's chief financial officer, said during a conference call on the Q1 earnings that IBM officials aren't worried about the prospect of tougher competition from a combined Oracle and Sun. "As I look at this and ask myself what's really changed, I think nothing," Loughridge said.

IBM knows both Oracle and Sun well, he added, and if those two companies end up having "the same address and mailbox, it's the same teams we've been competing against and winning against in the field."

Although he wouldn't confirm that IBM had tried to buy Sun, Loughridge said the vendor has enough cash for any significant acquisition opportunities that might arise. IBM will look to make investments that contribute to its products for cloud computing and business optimization as well as its Smarter Planet initiative, he said, while noting that the company has bought more than 100 businesses since 2000 at a total cost of about $20 billion.

IBM is still clearly struggling amid the economic recession, although Loughridge that said recent efficiency improvements should start to pay off soon. For example, IBM has shed workers in several rounds of job cuts this year, although it has refrained from describing them as layoffs and hasn't disclosed the number of employees let go.

First-quarter revenue in the company's Global Technology Services unit decreased 10% compared with the same period last year, falling to $8.8 billion, and its Global Business Services division saw a 10% revenue decline to $4.4 billion.

Revenue from IBM's software operations also declined year to year in Q1, dropping 6% to $4.5 billion. Revenue from the company's middleware products, which include WebSphere, Tivoli and Lotus, dropped 5% to $3.6 billion.

Despite the first-quarter revenue decline, IBM is sticking with its full-year earnings estimate of $9.20 per share and said it is ahead of plan for reaching $10 to $11 per share next year.

"If anything, I feel more confident in that objective," Loughridge said. That's because the efforts to improve productivity and reduce spending are about to start paying off, he added. "Much of our restructuring activity was front-end-loaded in the year," Loughridge said. "We have that largely behind us, especially in the U.S., but the benefit is largely ahead of us."

Copyright © 2009 IDG Communications, Inc.

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