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Last updated: October 17, 2005 11:24 pm

IBM boosted by cuts in services unit

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IBM on Monday continued its recovery from a weak start to the year as it reported a bounce in earnings thanks to cost-cutting in its large services division, particularly in Europe.

Adjusted for the disposal of its PC business, which was sold to Lenovo of China earlier this year, Big Blue said that its revenues had crept up by 4 per cent to $21.5bn.

This was a similar increase to the one seen in the preceding three months and a recovery from the negligible 1 per cent gain of the first quarter.

A restructuring that was launched in the wake of the first quarter’s disappointing performance fed through into greater productivity in the company’s services unit in the most recent period, leading to a 25 per cent rebound in its earnings per share from a year ago, after adjusting for one-off items in both periods.

However, while Mark Loughridge, chief financial officer, said those improvements in profitability were likely to be extended in the final quarter, of the, IBM’s shares remain about around 14 per cent below their level at the start of the year.

Along with the sale of the PC unit, which has been assumed by Lenovo, the lower expenses enabled IBM to lift its gross profit margin to 40.6 per cent – up from 36.5 per cent a year before.

The company’s services division, which accounts for 54 per cent of its revenues, notched up a 1.7 percentage point improvement in its gross profit margin, to 26 per cent.

Mr Loughridge said that about around 90 per cent of the cost savings from the planned restructuring had been achieved by the end of the quarter, with the rest due before the end of this year.

The services division also recorded a second consecutive quarter of solid new contract signings, ending a string of quarters in which bookings had edged down.

Though lower than the $14.6bn of the preceding quarter, the $11.1bn of new bookings recorded in the three months to the end of September was $1.4bn more than in the same period in 2004.

While European revenues rose by 5 per cent, Germany and Italy continued to show weakness, said Mr Loughridge.

IBM has started moves launched actions to boost its competitiveness in Japan, which accounts for 60 per cent of its revenues in the Asia-Pacific region and was responsible for a 2 per cent decline in the area, region, he added.

IBM reported net income of $1.5bn, or 94 cents per share.

After adjusting for a one-off tax charge to reflect the repatriation of cash held overseas, earnings rose to $1.26 a share.

This was 22 per cent up from the adjusted earnings figure of last year and ahead of the $1.13 that analysts had been expecting.

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