IBM Wraps Up 2012 With Flat Sales, Higher Profits

IBM closed out 2012 with essentially flat sales from one year earlier, but with a solid boost to the company's fourth-quarter bottom line.

The company's revenue from services and hardware both declined in the quarter -- the latter despite a huge increase in mainframe system sales -- while software sales grew modestly.

IBM reported total revenue of $29.3 billion for the fourth fiscal quarter ended Dec. 31, 2012, down less than 1 percent from $29.5 billion in the same period in fiscal 2011. Net income was $5.83 billion, up more than 6 percent from $5.49 billion one year earlier.

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For all of fiscal 2012, IBM reported total revenue of $104.5 billion, down 2 percent from $106.9 billion in fiscal 2011. Net income for the entire year was 16.6 billion, up nearly 5 percent from $15.9 billion in fiscal 2011.

The results reflect IBM's increased emphasis in recent years on boosting gross margins and profitability rather than on revenue growth.

"While our overall revenue performance was modest, we had 8 percent growth in our operating net income and expanded net income margins by 1.6 points, well above our model level," said CFO Mark Loughridge, in a conference call with financial analysts Tuesday.

"We had strong performance in our growth initiatives," he said. "We expanded our margins and had excellent profit growth, which drove our tenth consecutive year of double-digit [earnings per share] growth."

IBM's software business generated $7.9 billion in sales in the fourth quarter, up nearly 3 percent from the same period one year earlier. Sales of some key products grew substantially including Rational development tools, up 12 percent year-over-year, WebSphere software, up 11 percent, and Lotus products, up 9 percent.

"We had another good quarter in software. Performance was broad-based, driven by business analytics, smarter commerce and cloud," Loughridge said.

IBM spent $4 billion to acquire 11 companies in 2012, bringing the total spending for acquisitions -- most of them software companies -- in the last three years to $11.5 billion.

NEXT: Slower Sales In IBM's Hardware And Services Businesses

IBM's Systems and Technology group reported revenue of $5.8 billion in the quarter, down 1 percent year-over-year as reported, but up 4 percent when factoring out the company's retail store systems line that was sold to Toshiba in August for $850 million.

A recently launched upgrade for the company's System z mainframe computers boosted that product line's sales by a whopping 56 percent year-over-year. But, Power Systems sales were down 19 percent in the quarter, storage systems dropped 5 percent and System x sales were down 2 percent.

IBM has not reported growth in its Systems and Technology operations since the third quarter of 2011 when hardware sales grew 4 percent. But, the rate of decline has slowed: Hardware sales plunged 13 percent in this year's third quarter.

In the quarter, IBM had 350 "competitive displacements" -- situations where competitors' hardware products were swapped out in favor of IBM products. Loughridge said those deals were worth about $355 million with those competitive wins about evenly split against rivals Oracle and Hewlett-Packard.

IBM's Global Technology Services operations generated $10.3 billion in revenue in the fourth quarter, down less than 1 percent from the same period one year earlier. Revenue from Global Business Services was $4.7 billion, down more than 3 percent year-over-year. Loughridge said IBM is retooling GBS to focus on "higher value work" with business analytics, smarter planet and cloud services now accounting for one-third of the GBS business.