Software, Services Propel IBM To Strong Q4


Software and services accounted for 84 percent of IBM's total business, while revenue for its server, storage, and retail hardware business continues to fall.

IBM on Tuesday reported revenue of $27.2 billion in the fourth quarter of 2009, which ended December 31. This was down 0.8 percent compared to the $27 billion the company reported in the fourth quarter of 2008.

The company also reported earnings for the quarter of $4.8 billion, or $3.59 per share, up 9 percent compared to the same period last year.

For the entire year, IBM reported revenue of $95.8 billion, down about 8 percent compared to the $103.6 billion reported for all of 2008. The company earned $13.4 billion for the year or $10.01 per share, up about 9 percent compared to the $12.3 billion, or $8.89 reported last year.

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The growth in profit represents changes IBM has made in its product mix, said Mark Loughridge, senior vice president and CFO for the vendor.

In 2009, 42 percent of pre-tax income came from software, while another 42 percent came from services, Loughridge said. This compared to 25 percent from software and 40 percent from services in 2000, he said.

The Americas is still IBM's main market by geography. However, sales in the Americas fell 3 percent in the fourth quarter compared to the same period of 2008, while EMEA (Europe, Middle East, and Africa) sales rose 2 percent and Asia Pacific by 6 percent, led by a 10 percent growth in sales to China, Loughridge said.

On a segment-by-segment basis, IBM's global technology services business had revenue of $10.1 billion in the fourth quarter, up 4 percent compared to the same period last year. The company's global business services revenue totaled $4.6 billion, down 3 percent over the same period last year.

"Our two global services segments did a great job of delivering value," he said.

Total software revenue for IBM in the fourth quarter was $6.6 billion, up 2 percent from the same period last year. IBM reported strongest growth in its WebSphere family, with sales up 13 percent over last year, compared to growth of 7 percent for both its information management software and Tivoli offerings. That included double-digit growth in Tivoli data protection and data management applications Loughridge said.

However, Lotus revenue fell 5 percent and revenue from its Rational business fell 4 percent year-over-year.

Overall, IBM saw its ninth consecutive quarter of software sales growth and expanded software profit margins for the entire year, despite a difficult comparison against the fourth quarter of 2008, he said.

IBM has a very strong first quarter opening pipeline for software sales, he said.

IBM's systems and technology sales reached $5.2 billion in the fourth quarter, down about 4 percent compared to the same period last year. However, this segment had gross margins of 42.5 percent, up 2.6 percent over last year, making it IBM's fastest-growing segment in terms of gross margin, Loughridge said.

IBM experienced strong growth in its System x (x86-based) server and in its blade server sales, and gained market share in its System x, System z, blade server, and storage sales.

Sales of IBM's System z mainframes fell 27 percent in the fourth quarter, but Loughridge said that was expected as IBM plans to introduce its next-generation mainframes this year.

Sales of System p servers, which now includes IBM's System i servers after the two product lines were converged into one, fell 14 percent compared to last year. However, Loughridge said, IBM this year plans to introduce a new generation of System p servers featuring two times to three times the performance of the existing servers while consuming the same amount of power.

Sales of IBM's System x servers rose 37 percent, led by a 56-percent increase in blade server sales, Loughridge said.

Total storage sales grew 1 percent compared to the same period ast year.

However, retail store solution sales fell 5 percent, Loughridge said.

"We saw an improving level of performance (in our hardware business). . . . As we go into the first quarter, we expect our (hardware) business to grow by 4 to 5 points," he said.

Looking forward, IBM expects full-year 2010 earnings to reach at least $11.00 per share, Loughridge said. IBM had originally been expecting to reach the $11-per-share mark in 2012.

"Our performance was pretty remarkable given the economic situation," he said. "(To hit our $11.00 EPS goal) one year earlier than planned is pretty remarkable after two years of economic downturn."