INDUSTRY

IBM announced third-quarter 2006 diluted earnings of $1.45 per share from continuing operations, an increase of 54 percent as reported, compared with diluted earnings of $.94 per share in the third quarter of 2005; the third-quarter 2005 diluted earnings include $.32 per share for a one-time charge of $525 million for taxes in connection with the 2005 repatriation of foreign earnings. Diluted earnings per share for the third-quarter 2006 grew 15 percent compared with the year-ago quarter of $1.26 per diluted share, without the one-time per share charge. Third-quarter income from continuing operations was $2.2 billion compared with $1.5 billion in the third quarter of 2005, including the one- time charge, an increase of 47 percent. Income from continuing operations for the third quarter grew 9 percent compared with the third-quarter 2005 income from continued operations of $2.0 billion, excluding the one-time charge. Total revenues for the third quarter of 2006 of $22.6 billion increased 5 percent (4 percent, adjusting for currency) from the third quarter of 2005. Samuel J. Palmisano, IBM chairman, president and chief executive officer, said: "Our strong performance is the result of excellent execution and the repositioning of IBM's business model to capture the growth and profit areas of a rapidly changing IT industry." From a geographic perspective, the Americas third-quarter revenues were $9.8 billion, an increase of 3 percent as reported (2 percent, adjusting for currency) from the 2005 period. Revenues from Europe/Middle East/Africa were $7.3 billion, up 6 percent (2 percent, adjusting for currency). Asia-Pacific revenues increased 4 percent (6 percent, adjusting for currency) to $4.5 billion. OEM revenues were $1.0 billion, up 24 percent compared with the 2005 third quarter. Revenues from Software were $4.4 billion, an increase of 9 percent (7 percent, adjusting for currency) compared with the third quarter of 2005. Revenues from IBM's middleware brands, which include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.4 billion, up 12 percent versus the third quarter of 2005. Operating systems revenues decreased 6 percent to $552 million compared with the prior-year quarter. Revenues from other software and services increased, which includes the Product Lifecycle Management portfolio of products. 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 30 percent. Revenues for Information Management software, which enables clients to leverage information on demand, increased 12 percent. Revenues from Tivoli software, infrastructure software that enables customers to centrally manage networks including security and storage capability, increased 44 percent, and revenues for Lotus software, which allows collaborating and messaging by customers in real-time communication and knowledge management, increased 8 percent year over year. Revenues from Rational software, integrated tools to improve the processes of software development, increased 2 percent compared with the year-ago quarter. Revenues from Global Services increased 3 percent (2 percent, adjusting for currency) to $12.0 billion in the third quarter of 2006. IBM signed services contracts totaling $10.5 billion and ended the quarter with an estimated services backlog, including Strategic Outsourcing, Business Transformation Outsourcing, Global Business Services, Integrated Technology Services and Maintenance, of $109 billion. Hardware revenues increased 9 percent (8 percent, adjusting for currency) to $5.6 billion in the third-quarter 2006 compared to $5.1 billion in the year-ago period. Systems and Technology Group (S&TG) revenues totaled $5.5 billion for the quarter, up 10 percent. S&TG revenues from System z server products increased 25 percent compared with the year-ago period. Total delivery of System z computing power, which is measured in MIPS (millions of instructions per second), increased 16 percent. Revenues from the System p UNIX server products increased 10 percent compared with the 2005 period. Revenues from the System x servers increased 4 percent, and revenues from the System i servers decreased 22 percent. Revenues from Microelectronics increased 29 percent and revenues from System Storage increased 12 percent. Global Financing revenues decreased 2 percent (3 percent, adjusting for currency) in the third quarter to $591 million. The company's total gross profit margin was 42.0 percent in the 2006 third quarter compared with 40.6 percent in the 2005 period. Total expense and other income increased 8 percent to $6.3 billion compared with the prior-year period. SG&A expense increased 11 percent to $5.1 billion. RD&E expense increased 7 percent compared with the year-ago period. Intellectual property and custom development income increased to $242 million compared with $213 million a year ago. Other (income) and expense was income of $174 million in the third quarter of 2006 versus income of $99 million in the third quarter of 2005. IBM's effective tax rate in the third-quarter 2006 was 30.0 percent, compared with 48.0 percent in the third quarter of 2005. The tax rate decrease was substantially driven by the incremental tax charge of $525 million in the third quarter of 2005 related to the company's repatriation of foreign earnings. Share repurchases totaled approximately $1.6 billion in the third quarter. The weighted-average number of diluted common shares outstanding in the third-quarter 2006 was 1.53 billion compared with 1.62 billion shares in the same period of 2005. As of September 30, 2006, there were 1.51 billion basic common shares outstanding. IBM ended the third quarter of 2006 with $10.9 billion of cash on hand. The balance sheet remains strong, and the company is well positioned to take advantage of opportunities. Debt, including Global Financing, totaled $22.0 billion, compared with $22.6 billion at year-end 2005. From a management segment view, the non- global financing debt-to-capitalization ratio was 2.3 percent at the end of September 30, 2006, and Global Financing debt increased $771 million from year-end 2005 to a total of $21.3 billion, resulting in a debt-to-equity ratio of 6.9 to 1. Year-To-Date 2006 Results Income from continuing operations for the nine months ended September 30, 2006 was $6.0 billion, compared with $4.8 billion in the year-ago period, which includes a charge of $525 million for taxes in connection with the 2005 repatriation of foreign earnings, and non-recurring pretax items for incremental restructuring charges of $1.7 billion, offset by the $1.1 billion gain on the sale of the Personal Computing (PC) business, and the $775 million legal settlement received from Microsoft. Diluted earnings per share from continuing operations were $3.81 compared with $2.92 per diluted share for the 2005 period. Revenues from continuing operations for the nine-month period totaled $65.2 billion, a decrease of 2 percent as reported and adjusting for currency compared with $66.7 billion for the nine months of 2005, which includes PC revenues of $2.9 billion for the first four months of 2005 only. Excluding the divested PC business, revenues increased 2 percent (3 percent, adjusting for currency) compared with the nine-month period of 2005. For total operations, net income for the nine months of 2006 was $6.0 billion, or $3.81 per diluted share, compared with the nine months of 2005 net income of $4.7 billion, or $2.90 per diluted share, which included a loss from discontinued operations of $27 million. Conference Call and Webcast IBM's regular quarterly earnings conference call is scheduled to begin at 4:30 p.m. EDT, today. Investors may participate by viewing the Webcast at www.ibm.com/investor/3q06. Presentation charts will be available on the Web site prior to the Webcast.