IBM At A Record High

IBM (NYSE:IBM) this week reported strong results that beat estimates driven by increased tech spending. Ten years ago, IBM made a strategic shift to higher-margin software and services while divesting its low-margin commoditized businesses such as computers. That shift in strategy has paid off: IBM reported almost $100 billion in revenue in 2010 and plans to add $20 billion more by 2015.

Financials
IBM reported fourth quarter revenue of $29 billion, up 7%. Net income increased 9% to $5.3 billion or $4.18 per diluted share from $4.8 billion or $3.59 per share in the fourth quarter of 2009. Gross profit margin was 49% versus 45.3% last quarter and 48.3% last year.

For the full fiscal year 2010, revenue was up 4% to $99.9 billion, net income was up 10% to $14.8 billion, and gross profit margin was 46.1%, up from 45.7% last year. IBM ended the year with $11.7 billion of cash on hand and debt of $28.6 billion. During the year, the company returned $18.6 billion to shareholders through $3.2 billion in dividends and $15.4 billion of share repurchases.

In the fourth quarter, total Global Services revenues increased 2% with Global Technology Services revenue up 1% to $10.2 billion and Global Business Services revenue up 4% to $4.8 billion. Systems and Technology revenue was up 21% to $6.3 billion. Software revenue was up 7% to $7 billion with the company’s key middleware products, which include WebSphere, Information Management, Tivoli, and Lotus, increasing 13% to $4.7 billion, while business analytics revenue was up 19%. Revenue from IBM’s growth markets increased 15% with revenues in the BRIC countries – Brazil, Russia, India, and China – increasing 19%, and a total of 50 growth market countries had double-digit revenue growth.

During the quarter, IBM signed services contracts of $22.1 billion, up 18%, of which 19 contracts were greater than $100 million. Transactional signings were $8.0 billion, up 8%, and outsourcing signings were $14.1 billion, up 24%. Total services backlog ended the year at $142 billion, which is a sign of strong growth ahead.

IBM said that it expects to deliver full-year 2011 GAAP EPS of at least $12.56; and non-GAAP EPS of at least $13.00, which puts the company on track for the 2015 road map of at least $20 of non-GAAP EPS. IBM’s shares are trading around $155.80 with market cap of about $192 billion. The stock hit a 52-week high of $156.13 on January 19.

Future Focus Areas
IBM has been focusing on analytics software and cloud computing, which the company forecasts will become $16 billion and $3 billion businesses respectively by 2015. As part of the Thought Leaders in Cloud Computing Series, I have interviewed Pat Toole, the CIO of IBM and Ric Telford, vice president of Cloud Services at IBM. The company expects Smarter Planet, an initiative to digitally monitor infrastructure such as roads, energy, and hospitals to make them more efficient, to grow to a $10 billion business.

IBM plans to spend about $20 billion on acquisitions through 2015. In 2010, IBM spent roughly $6 billion to acquire 17 companies, including the purchase of storage-computer maker Netezza Corp. for $1.7 billion. I recently suggested that IBM should focus on the security and cybersecurity aspects in the cloud through acquisitions. Possible prospects include Qualys, a provider of on-demand vulnerability management and policy compliance solutions, e-mail security provider Proofpoint, and Palo Alto Software, a rapidly growing next-generation firewall provider. IBM’s strategy has been to acquire companies in the infrastructure software space, and these three security companies are each excellent prospects that will each turn into billion-dollar businesses for the company.

IBM also announced this week that it will collaborate with ARM on designing 14 nanometer semiconductor technology. After challenging Intel in netbooks, ARM, which provides the architecture for low power consuming chips, is looking to challenge Intel chips in the data center. Another company that is making non x86 chips targeting the data center is Tilera, a chip startup that recently raised $45 million from investors including Cisco and Samsung. Could Tilera be an IBM acquisition? Perhaps!