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IBM defies hardware woes with record 2008

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There's a lot of bad economic news floating around, but there wasn't much coming out of Armonk, New York, today as IBM reported its financial results for the fourth quarter of 2008. Despite the Meltdown, IBM reached record revenue, pre-tax profit, cash flow, and earnings per share levels in 2008, thanks to a strong close in the final quarter of the year.

Not that the fourth quarter was perfect, mind you. IBM's worldwide sales - as reported in U.S. dollars - fell by 6.4 per cent to just over $27bn, mainly as x64 servers and storage took big hits and services sales took smaller hits. IBM was nonetheless able to cut costs, expenses, and taxes enough to boost net income by 12 per cent to $4.4bn in the quarter. And thanks to the magic of share buybacks, IBM was able to boost earnings per share by 17.1 per cent to $3.28. For all of 2008, IBM's sales rose by 4.9 per cent to $103.6bn, and net income rose by 18.4 per cent to $12.3bn. That works out to $8.93 per share of profit.

Which doesn't sound like a company that's getting ready to axe up to 16,000 employees, as has been rumored. But maybe there are some job cuts coming on January 23 after all. Mark Loughridge, IBM's chief financial officer, said in a conference call with Wall Street analysts that in 2009, IBM would do the normal "workload rebalancing." That's IBM's euphemism for targeted layoffs that don't trigger filings with the Securities and Exchange Commission. In other words, we won't know how many people get the axe. He added that in a typical year, IBM books somewhere between $300m and $400m in restructuring charges, and that in 2008, it did something north of $700m.

He did not say how many job cuts that works out to. But he did say that in 2009, given that IBM expects revenues to shrink in the first half of the year, this workload rebalancing act would be front loaded.

In a canned statement, Sam Palmisano, IBM's chairman and chief executive officer, seemed pretty chipper. "A strong fourth quarter capped an outstanding year," Palmisano said. "In 2008, IBM performed well in an extremely difficult economic environment. Clearly our strategic transformation - migrating to the more profitable segments of the industry, investing in growth regions of the world, and driving productivity through global integration - is continuing to pay dividends.

"With our strong financial position, solid recurring revenue and profit streams and global reach, we are confident about 2009 and, based on our 2008 performance, we are ahead of pace on our roadmap for $10 to $11 per share."

As has been the case for years, services was the revenue leader at IBM, with the Global Technology Services group posting $9.6bn in sales in Q4, down 3.7 per cent, and Global Business Services hitting $4.7bn in revenue, down 4.5 per cent. When measured in local currencies, GTS had 3 per cent revenue growth globally in the quarter, while GBS was flat. IBM was able to boost pre-tax income for these combined services units by 32 per cent compared to last year's Q4.

Services gross margins are growing while hardware margins keep falling. They could meet soon. IBM ended the quarter with a $117bn backlog in services deals, up $2bn from a year earlier.

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