INDUSTRY

IBM announced first-quarter 2006 diluted earnings per common share of $1.08 from continuing operations, compared with diluted earnings of $.85 per share in the first quarter of 2005, an increase of 27 percent. First-quarter income from continuing operations was $1.7 billion compared with $1.4 billion in the first quarter of 2005, an increase of 21 percent. Total revenues for the first quarter of 2006 of $20.7 billion decreased 10 percent (7 percent, adjusting for currency) from the first quarter of 2005, which includes revenue from the divested PC business. Excluding the PC revenue, revenues were flat (up 4 percent, adjusting for currency) compared with the first quarter of 2005. Samuel J. Palmisano, IBM chairman and chief executive officer, said: "IBM had a good quarter with excellent earnings-per-share results. We continued to improve our profit performance with our strategic focus on higher-value segments of the marketplace, as well as with our emphasis on productivity and global integration. Our performance underscores the strength of our business model across a balanced portfolio of software, services and hardware, and demonstrates the benefits of the strategic actions we've taken in recent years to reposition the company. "We had very strong results in middleware and continued revenue growth in microelectronics for our 300-millimeter wafer products that serve the major gaming platforms. Services signings increased, services margins rose for the seventh straight quarter year to year, and IBM again grew in emerging markets. Our cash position remains strong. After investing in our business and returning nearly $3 billion to investors, we ended the quarter with a cash balance of more than $12 billion, significantly above a year ago. Our clients continued to demonstrate that they value IBM's ability to help them innovate." From a geographic perspective, the Americas first-quarter revenues were $9.0 billion, a decrease of 3 percent as reported (up 6 percent, adjusting for currency and PCs) from the 2005 period. Revenues from Europe/Middle East/Africa were $6.7 billion, down 14 percent (up 3 percent, adjusting for currency and PCs). Asia-Pacific revenues decreased 21 percent (2 percent, adjusting for currency and PCs) to $4.1 billion. OEM revenues were $873 million, up 26 percent compared with the 2005 first quarter. Revenues from Global Services, including maintenance, decreased 1 percent (up 3 percent, adjusting for currency) to $11.6 billion in the first quarter of 2006. IBM signed services contracts totaling $11.4 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 $111 billion. IBM's revenues from the emerging growth areas of Business Performance Transformation Services and emerging countries without the PC business increased 24 percent and 27 percent in the first quarter of 2006, respectively. Hardware revenues decreased 32 percent (31 percent, adjusting for currency) to $4.6 billion in the first-quarter 2006 compared to $6.8 billion in the year-ago period, which includes revenue from the divested PC business. Hardware revenues without the PC business increased 3 percent (6 percent, adjusting for currency). Hardware revenues for the Systems and Technology Group totaled $4.4 billion for the quarter, up 3 percent (6 percent, adjusting for currency). Revenues from the System x server products increased 10 percent compared with the year-ago period. Revenues from the System p UNIX servers decreased 9 percent and revenues from the System i servers decreased 22 percent. Revenues from the System z server products decreased 6 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 22 percent. Revenues from Microelectronics increased 37 percent and revenues from System Storage increased 6 percent. Revenues from Software were $3.9 billion, an increase of 2 percent (6 percent, adjusting for currency) compared with the first quarter of 2005. Revenues from IBM's middleware brands, which include WebSphere, DB2, Tivoli, Lotus and Rational products, were $3.0 billion, up 6 percent versus the first quarter of 2005. Operating systems revenues decreased 12 percent to $520 million compared with the prior-year quarter. 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 26 percent. Revenues for Information Management software, which enables clients to leverage information on demand, increased 6 percent. Revenues from Tivoli software, infrastructure software that enables customers to centrally manage networks and storage, increased 24 percent, and revenues for Lotus software, which allows collaborating and messaging by customers in real-time communication and knowledge management, were flat year over year. Revenues from Rational software, integrated tools to improve the processes of software development, decreased 8 percent compared with the year-ago quarter. Global Financing revenues increased 1 percent (4 percent, adjusting for currency) in the first quarter to $583 million. The company's total gross profit margin was 39.1 percent in the 2006 first quarter compared with 36.0 percent in the 2005 period, which includes the divested PC business. Excluding the PC business, the first-quarter 2005 gross profit margin was 38.7 percent. Total expense and other income decreased 10 percent to $5.6 billion compared with the prior-year period. SG&A expense decreased 7 percent principally as a result of the sale of the PC business. RD&E expense was $1.5 billion, flat compared with the year-ago period. Intellectual property and custom development income increased to $229 million compared with $219 million a year ago. Other (income) and expense was $246 million of income in the first quarter of 2006, versus $22 million of expense in the same period last year. IBM's effective tax rate in the first-quarter 2006 was 30.0 percent, compared with 30.0 percent in the first quarter of 2005. Share repurchases totaled approximately $2.5 billion in the first quarter. The weighted-average number of diluted common shares outstanding in the first-quarter 2006 was 1.59 billion compared with 1.66 billion shares in the same period of 2005. As of March 31, 2006, there were 1.55 billion basic common shares outstanding. IBM ended the first quarter of 2006 with $12.3 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 $22.5 billion, compared with $22.6 billion at year-end 2005. From a management segment view, the non-global financing debt-to-capitalization ratio was 4.4 percent at the end of March 31, 2006, and Global Financing debt increased $0.6 billion from year-end 2005 to a total of $21.1 billion, resulting in a debt-to-equity ratio of 6.9 to 1.