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By Martin LaMonica, 19 July 2005 08:17

NEWS IBM rebounded from a disappointing first quarter, reporting second-quarter financial returns that bested financial analysts' forecasts.

The company said its diluted earnings per share were $1.12 for the quarter ended 30 June, an 11 per cent increase compared with the same period last year. Analysts surveyed by First Call had predicted $1.03 earnings per share.

Excluding nonrecurring items, IBM's income from ongoing operations was up four per cent to $1.82bn, and revenue increased six per cent compared with the second quarter of 2004 (or four per cent adjusted for currency).

Chief financial officer Mark Loughridge said in a conference call: "We saw good demand for our services business, as demonstrated by our signings performance. We were notably strong across our Power server brands and key middleware products."

The company surprised Wall Street in the first quarter of this year with disappointing earnings, which Big Blue blamed on weak spending in Europe and sales-execution problems.

That led to a reorganisation of IBM's Europe operations and the elimination of more than 10,000 jobs at the company, largely in Western Europe and the US. At the same time, the company moved some of the operations from its Global Services division to lower-cost regions in Asia and Eastern Europe.

In the second quarter this year, IBM took a one-time charge of $1.7bn for the restructuring.

The company also accounted for the sale of its PC business to Lenovo, which brought a gain of $1.1bn.

Finally, IBM received $775m when, earlier this month, Microsoft settled claims, stemming from the US Department of Justice's late 1990s antitrust suit against the Windows maker.

"IBM returned to form in this quarter," IBM CEO Sam Palmisano said in a statement.

Revenue from global services climbed six per cent, or four per cent adjusted for currency, to $12bn in the second quarter. As he has previously, Loughridge singled out the rapid growth of IBM's Business Performance Transformation Services, the company's high-end consulting and outsourcing services, which grew more than 25 per cent.

Hardware revenue fell 25 per cent to $5.6bn in the second quarter. Excluding its divested PC business, hardware revenue was up five per cent, or four per cent adjusted for currency.

The company's mainframe business slumped in the quarter by more than 24 per cent. IBM expects business to turn around when it introduces its latest zSeries mainframe server in the third quarter. The server will be detailed later this month, according to Loughridge.

IBM's software business had a strong quarter, rising 10 per cent to $3.8bn, or seven per cent in constant currency - the highest growth the company has seen in software in three years.

"Overall, we believe we have gained share in middleware in the second quarter," Loughridge said.

Loughridge said the company's second-quarter results were aided by a quick implementation of its European management restructuring and job reductions. The company will eliminate 14,500 jobs overall, 70 per cent of which are in Europe, and about 8,000 people have already left, Loughridge said.

"The results were driven by strong [customer] demand and execution throughout the quarter," he said. "We're pretty confident about this performance and we feel good about our second-quarter recovery."

Despite the one-quarter turnaround, Loughridge noted that the company faces challenges, including building up the number of pending services contracts.

The company is also focused on improving the financial performance of IBM in Italy, Germany, France and Japan, which combined saw a drop in revenue in the second quarter this year.

Martin LaMonica writes for CNET News.com