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Big Blue defies server crash with Q1 profit

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Despite some pretty steep revenue declines - particularly in server lines - that drove IBM's overall sales in the first quarter of 2009 down 11.4 per cent to $21.71bn, net income only fell by 1 per cent to $2.3bn. And thanks to some $1.8bn in share buybacks, earnings per share rose by 3.7 per cent to $1.70 a pop.

Either Big Blue is a genius IT company or it is burning its furniture to generate electricity to power the air conditioning to keep its business cool during the economic meltdown. I sure can't tell which it is. I can only tell you that what IBM has been doing has worked for the past few years, and it still seems to be working.

IBM generated $1bn in free cash flow in the quarter, and it has $12.3bn in cash and equivalents in the bank with which to do acquisitions and share repurchases, but then again, the company also has $9.9bn in short-term debt and $21.1bn in long term debt. Of that $31bn in total debt, $23.4bn of it is associated with its Global Financing operations, which finance equipment purchases for the reseller channel and for end users).

With $7.6bn in debts not associated with Global Financing, you can see why IBM was a little hesitant to shell out $6bn or so to acquire Sun Microsystems and put a serious damper on its profitability in 2009 and beyond while blowing its entire cash hoard. Without cash, IBM would not have the extra money it might need to boost earnings per share through cash buybacks.

Sam Palmisano, IBM's chairman, president, and chief executive officer, gave the same old speech he always gives when IBM does its quarterly announcements, and he did it in a statement rather than actually being on the conference call with Wall Street analysts after the market closed today.

"IBM continued to perform well in a very difficult economic environment," Palimisano wrote. "This was due to our long-term strategic focus: shifting into software and services, divesting of commodity businesses, and creating solutions that help clients reduce cost and conserve capital. At the same time we have a disciplined approach to cost and expense management giving us a strong financial position.

"We are well-positioned to continue to move aggressively and leverage our strong cash performance to make the most of the opportunities that arise, including smarter planet initiatives and other strategic options. We remain ahead of pace for our 2010 roadmap of $10 to $11 per share."

What Palmisano did not add was "and that is because we were not silly enough to buy Sun Microsystems." But just because the PR people at IBM didn't type that for Palmisano doesn't mean IBM's chief wasn't thinking it, as many IBMers most certainly are as Big Blue turned down a Sun takeover deal and this morning Oracle has come out of nowhere (well, Redwood Shores, actually) to save Sun from itself and buy it for $5.6bn.

The declines in IBM's Systems and Technology Group - which makes and sells processors, servers, storage, operating systems, and sundry electronics for retailers - were breathtaking. The Systems and Technology Group reported sales of $3.2bn, down 23 per cent. It is a testament to how much IBM has changed since the early 1990s that such declines are not killing the company. (Service used to be included with much more expensive iron. Now it is a separate budget item, and I suspect some days that the net price of systems burdened with people costs as well as hardware and software costs have not changed much in two decades when adjusted for inflation).

Mark Loughridge, IBM's chief financial officer, said during the call with Wall Streeters that revenue for System z mainframes was down 19 per cent (but only down 12 per cent at constant currency in the local markets where deals were done, with the 7 point spread being the effect of translating those deals into dollars and bringing them on home to Armonk, New York). The aggregate amount of computing power for mainframes that IBM shipped in the quarter actually rose by 18 per cent, Loughridge said, with MIPS shipments of so-called specialty engines that run Linux, WebSphere, or DB2 accelerators up 20 per cent and Linux-related MIPS up more than 50 per cent.

This is the fifth straight quarter where MIPS shipments were up by double-digits, indicating that the System z10 product cycle is doing as well as can be expected given the state of the economy. In growth markets, Loughridge said that System z mainframe sales grew by 60 per cent at constant currency, which translated in 37 per cent growth when converted to dollars.

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