IBM earned more than analysts expected in the first quarter.
After market close Tuesday, the information technology giant reported first quarter net income of $1.52bn (£0.96bn), or 83 cents per share. First Call's survey of 24 analysts predicted a profit of 78 cents per share for the three months ended March 31.
First quarter revenue fell 5 percent year-over-year to $19.3bn. IBM had previously told Wall Street to temper its revenue expectations because of Year 2000-related spending freezes by corporate clients and IBM's own internal actions.
"Nevertheless, we had good earnings per share, improving results in our server business, and strong performance in such growth areas as e-business services, database and Web application software, and custom chips," said Louis V. Gerstner, chairman and CEO.
Analysts generally expected flat revenue growth from IBM.
The company's overall gross margin rose to 36.2 percent from 35.7 percent in the year ago period.
Services was basically flat year-over-year at $7.6m as IBM no longer reaped the benefit of the IBM Global Networks business sold to AT&T. Y2K services also slid.
Excluding those segments, IBM's service revenue rose 9 percent year-over-year. The company signed $8.6bn in services contracts during the first quarter. E-business service revenue increased 70 percent.
Hardware revenue of $7.7bn represented a 12 percent decrease from a year earlier. PC revenue fell as IBM reduced dealer inventories and cut back on low margin specials. System/390 mainframe sales dropped. Sales rose for Netfinity servers, ThinkPad laptops and Web servers.
The overall server market was relatively healthy in the first quarter. IBM's chief rival in that segment, Sun Microsystems, last week reported stronger-than-expected earnings.
Microelectronics revenue improved as IBM shipped more custom logic chips. Storage sales retreated as IBM saw unexpected softness in hard disk drive sales.
Revenue from software was flat year-over-year at $2.9bn, with database and Lotus Notes growing while operating system revenue dropped. IBM's WebSphere application server product saw revenues double from a year ago.
Financing rose 16 percent to $816m.
IBM, continuing its longstanding practice under Gerstner's tenure, spent $2.1bn on stock buybacks during the quarter. Big Blue had 1.77bn basic shares outstanding at the end of March.
On a geographic basis, the Asia-Pacific region led IBM's growth with a 15 percent gain to $4bn. Europe/Middle East/Africa fell 13 percent to $5.4bn. The Americas generated revenue of $8.4bn, down 4 percent year-over-year.
Shares of IBM rose 3 1/4 to 115 1/8 in Monday's regular trading prior to the earnings report.
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