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IBM’s Robust Performance Persists

Posted on Wednesday, Jan 21st 2009

Yesterday, IBM (NYSE: IBM), the world’s leading computer services provider, yet again reported strong earnings for its fourth quarter that beat analyst expectations. Amidst the gloomy market conditions, its upbeat outlook brought some cheer.

For the full fiscal year 2008, IBM reported revenue of $103.6 billion, up about 5%, and earnings per share of $8.93. Analysts were expecting earnings of $8.69 per share on revenue of $104.75 billion. IBM ended 2008 with $12.9 billion of cash on hand and generated free cash flow of $14.3 billion, up $1.9 billion year over year, excluding Global Financing receivables. Debt, including Global Financing, was $33.9 billion, versus $35.3 billion in 2007. Global Financing debt was $24.4 billion versus $24.5 billion in 2007. The company repurchased shares worth $10.6 billion in the year.

Q4 revenue was, however, down 6% to $27.0 billion, affected by the stronger US dollar. Net income was $4.4 billion, up 12%. Diluted EPS was up 17% to $3.28, versus Street estimates of $3.03 per share on revenue of $28.15 billion. Gross profit margin was 47.9 %, versus 44.9% in Q407 and 43.3% in Q308. IBM ended the quarter with $13 billion of cash on hand.

Though sales have declined, IBM managed to increase earnings due to its focus on more profitable segments. The Software segment was the only one to record an increase in sales in Q4 – sales were $6.4 billion, up 3%. Revenue from middleware products including WebSphere, Information Management, Tivoli, Lotus and Rational products, was $5.2 billion, up 4%. Operating Systems revenue was down 6% to $622 million. Last year, IBM invested $6.3 billion in acquisitions, major ones being the $5 billion Cognos acquisitionand the $845 million Telelogic acquisition.

In other segments, Q4 revenue from Global Technology Services was down 4% to $9.6 billion, Global Business Services was down 5% to $4.7 billion, Global Financing was down 1% to $660 million and Systems and Technology was down 20% to $5.4 billion. Services signings were $17.2 billion, down 5%. IBM signed 24 deals greater than $100 million. Backlog at the end of the year was $117 billion, up $2 billion quarter over quarter.

By region, Q4 sales dropped in all geographies. The largest drop was 12% in EMEA. Revenue declined 2% in the Americas and 1% in Asia.

For the full year, revenue from Global Technology Services was up 9%, Global Business Services was up 9% and Software was up 11% while Systems and Technology revenue was down 10%. Global Financing revenues were $2.6 billion, up 2%. Last year’s coverage is available here.

Based on its performance, IBM expects full-year 2009 earnings of at least $9.20 per share versus analyst estimates of $8.75 per share for 2009. It is currently trading around $82 with a market cap of around $110 billion. The stock hit a 52-week low of $69.50 on November 21.

One of the trends that will blow in IBM’s favor is the tarnishing of the India, Inc. brand due to Satyam’s misconduct. A lot of outsourcing business is likely to come IBM’s way in 2009, with the primary competitor becoming Accenture.

Chart for International Business Machines Corp. (IBM)

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Hi Sramana,

I am a regular reader and a big fan.

I was just wondering whether you could tell us the difference between the strategies of companies like IBM which also have a footing in products compared to that of companies like Infosys and Wipro which are totally service based and why is there is a hitch in moving towards products.

Yuvraj Wednesday, January 21, 2009 at 1:08 PM PT

Hi Yuvraj,

Infosys and Wipro don’t seem to have the culture of products at all. It beats me why they haven’t still got it that they should be moving partially to products to change their business mix.


Sramana Mitra Wednesday, January 21, 2009 at 1:22 PM PT