Strong Services, Software Sales Boost IBM Q4 Profits

IBM on Tuesday reported a profit for its fourth quarter, which ended Dec. 31, of $4.4 billion, or $3.28 per share, compared to $4.0 billion, or $2.80 per share, during the same period in 2007.

Revenue for the quarter, however, fell six percent to $27.0 billion compared to last year's fourth quarter. U.S. revenue fell 2 percent compared to 2007. Gross margin for the quarter was 47.9 percent, up 3 points over 2007.

Mark Loughridge, IBM's senior vice president and CFO, said during Tuesday's financial conference call that changes in the value of the U.S. dollar had a big impact on revenue, and that taking out changes in currency would have resulted in a drop in revenue of only 1 percent.

Revenue fell across all industries. The best performance was the public sector, where revenue dropped only 1 percent, compared to 4 percent in the communications sector, 6 percent in the financial services and distribution sectors, 8 percent in the industrial sector and 9 percent in the small- and medium-business sector.

IBM did well in the fourth quarter thanks to solid performances in the software and services businesses, Loughridge said. "We ended the year in a strong financial position," he said.

Part of that strength came in recent changes to IBM's business over the past few years, such as the shedding of its printer business to Lexmark in 1991 and the sale of its PC business to Lenovo in 2005, as well as investment in services including IBM's acquisition of the global business consulting and technology services unit of PricewaterhouseCoopers in 2002, Loughridge said.

IBM's software business saw year-over-year growth in revenue of 3 percent to $6.4 billion. In the U.S., however, sales were up 10 percent over those of last year. Middleware software sales including WebSphere, Information Management, Tivoli, Lotus and Rational products, were up 4 percent to $5.2 billion. IBM's gross margin for the business was 87.7 percent, up 0.6 points, IBM said.

Total IBM global services revenue was down 4 percent over last year to $9.6 billion. This included a 4 percent drop in IBM's global technology services revenue and a 5 percent drop in IBM global business services revenue. However, margins for the two services businesses rose 4.8 points and 5.6 points respectively to 34.9 percent and 28.7 percent.

IBM's systems and technology business saw revenue fall 20 percent to $5.4 billion. Figuring heavily in the drop was a fall in x86 server revenue of 32 percent, along with a 20-percent drop in storage revenue and a 28-percent drop in retail store solutions.

The hardware bright spot was IBM's mainframe business, which fell only 6 percent, and its converged System p business, which rose 8 percent. IBM last year combined its system i and system p offerings.

Strong sales of IBM's high-end servers were offset by a drop in x86-based server sales thanks in large part to the increased use of server virtualization, which allows customers to virtualize several smaller servers into larger servers such as IBM's mainframes, Loughridge said.

While IBM's System x series of x86-based servers, especially its blade servers, remains an important part of IBM's portfolio for bringing complete solutions to customers, those customers are looking to save money while increasing performance of their IT infrastructures, Loughridge said.

"And you just can't beat a mainframe for virtualization I think that, with our hard platform, there's a real opportunity to deliver virtualization and cost savings," he said.

IBM's global financing business revenue was $660 million during the fourth quarter, down 1 percent compared to the same period last year. Loughridge said that because IBM was not involved in direct-to-consumer lending or in home mortgages, its finance business is strong compared to the financial business as a whole.

For all of 2008, IBM reported revenue of $103.6 billion, up 5 percent compared to the $98.8 billion reported in 2007. Earnings for the year were $12.3 billion, up 18 percent compared to 2007's $10.4 billion. Earnings per share were $8.93, up from $7.18 last year.

For 2009, IBM expects to see earnings per share increase to $9.20 for the year, with that number growing to $10 to $11 per share in 2010, Loughridge said.

IBM shares closed down over $2 per share for the day at $81.98. After the earnings report, which was released after the close of trade, IBM's share prices in after-hours trading is hovering at more than $86 per share.