Strong Storage Sales Boost IBM's Q2 Results

Despite an increasingly tough economic climate IBM reported a strong set of second quarter results last night, buoyed by services and strong storage sales.

IBMs second quarter revenues were $26.8 billion, up 13 percent on the same period last year, and well above analyst estimates of $25.92 billion.

The vendor earned $1.98 per share on net income of $2.77 billion in second quarter, up from $1.55 and net income of $2.26 billion in the same period last year. Analysts had estimated earnings of $1.82.

”This is one of the best quarters I’ve ever seen,” said Mark Loughridge, the IBM CFO, during a conference call last night, explaining that the vendor’s services business is going from strength to strength. “Our services momentum continued with great revenue growth, signings growth, and margin expansion.”

IBM’s Global Technology Services grew over 15 percent in second quarter to $20.5 billion and the vendor’s Business Services operation experienced similar growth, bringing in $10.5 billion.Storage was also highlighted by Loughridge as a revenue driver during last night’s call.

“Our systems business grew 10 percent, or 4 percent at constant currency, driven by double-digit growth in System z, POWER systems, and storage,” he said. “Customers continue to leverage the fast payback from IT efficiencies driven by virtualization and consolidation into high-end systems.”

Specifically, IBM’s storage revenues were up 12 percent from the same period last year, although the vendor did not break out a dollar amount. IBM’s disk business grew 20 percent in second quarter, according to the CFO, who singled out the contribution of the firm’s DS8000 storage system.

“We had double-digit growth in enterprise disk on continued strength of the DS8000, which was up 24 percent,” he explained. “We also had strong performance in mid-range and low-end disk, growing 28 percent.”

IBM’s tape business was less robust, declining 2 percent year-over-year, although Loughridge attributed this shortfall to the recently launched TS1130 Tbyte tape drive.”Customers paused in advance of our new high-end product which we announced earlier this week,” he said. “We believe we held share in tape.”

At least one analyst feels that IBM’s mainframe business, which grew 32 percent year-over-year, also helped boost its storage operation.

“We believe IBM’s System z growth also helped drive the reported 12 percent year-to-year growth in storage – as customers select IBM storage to support their mainframe environments,” wrote TBR analyst Josh Farina, in a note released last night. “We expect that IBM’s storage will continue to post double digit growth in the second half of 08 as growth returns to its tape segment and disk continues to benefit from IBM’s high-end server growth.”

Despite its strength in storage and mainframes, IBM experienced weakness in other parts of its product portfolio, such as its System x and System i servers, where revenues dropped 5 percent and 47 percent, respectively.

“Low-end System x, legacy System i, and microelectronics remained the weakest segments in the company’s hardware portfolio,” wrote TBR analyst Farina, in his note, explaining that demand for richer-configured servers for virtualization is eroding IBM’s low-end System x business. “System I demand has declined and will continue to do so as customers select IBM’s new POWER System servers.”The vendor’s global revenues also revealed that U.S. businesses are not spending on at the rate of their overseas counterparts, something that was also noted by rival vendor Sun in its third quarter results.

IBM’s U.S. revenues grew just 5 percent in the second quarter, compared to 16 percent in Asia Pacific and 20 percent in EMEA.

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