Big Blue boosts profits despite sales slump
If the global economy is improving, IBM's top line numbers aren't showing it yet.
To be sure, the company was able to eke out 1 per cent revenue growth in the fourth quarter of 2009, with sales of $27.2bn, and net income rose 8.7 per cent, to $4.8bn. But given how awful the fourth quarter of 2008 was - and that IBM's sales were down 5 per cent at constant currency in the third quarter of 2009 - you'd think that the company could have done more than hit replay and managed a bigger boost in Q4.
Thanks to share buybacks and cost cutting, IBM was able to post earnings per share of $10.01 for the full year, and according to Mark Loughridge, Big Blue's chief financial officer, that's at the low end of the EPS target the company set for 2010 way back in 2007. Apparently, this is what matters most - at least if your bonus at IBM or on Wall Street is pegged to IBM's EPS figures.
For all of 2009, IBM's sales were down 7.6 per cent, to $95.8bn, and net income rose by 8.8 per cent to $13.4bn. With $14bn in cash, IBM might actually have the money need to purchase Sun Microsystems at the $7.4bn price Sun was asking a year ago. But that boat has sailed. Sun eventually got that price from Oracle, and the Sunacle deal is expected to receive approval from the European Union antitrust commission any day now.
No matter. IBM didn't want Sun badly enough, and the company thinks that its investments in core hardware and software infrastructure, smart planet projects and marketing, cloud computing, and the ongoing march of outsourcing and business re-engineering services will win the company market share and profits just the same.
"This was a great year in a very tough environment," said Loughridge more than once during the call with Wall Street analysts. He made it clear that IBM would be able to hit its target of at least $11 in EPS for 2010. Loughridge did not venture any guesses about what IBM's revenue might look like this year.
During the fourth quarter, IBM's Global Services behemoth raked in $14.6bn in revenues, up 2.1 per cent as reported but down 5 percent at constant currency like IBM overall. Global Technology Services (which peddles outsourcing and integrated technology services) saw a 4.4 per cent rise to just over $10bn and Global Business Services (which does application outsourcing, business process consulting, and systems integration) had a 2.8 per cent decline to $4.6bn.
IBM exited the fourth quarter with an impressive $137bn services backlog, which Loughridge said was up $7bn compared to a year ago. Global Services had $18.8bn in new contract signings in the quarter, up 9 per cent compared to Q4 2008. Notably, application outsourcing business had $2.8bn in bookings, up 65 per cent as reported. If that is a leading indicator of anything, it is that some companies are sick to death of supporting infrastructure.
This may or may not be a good sign for IBM.
Next page: Software sales up (a bit)
Redundancy by Stealth in IBM UK
Question: How does IBM increase its profits and Earnings Per Share figure through the recession with decreasing sales?
Answer: By aggressive cost cutting, aggressive offshoring of jobs from the US and the UK, and huge share buybacks. Many would say this is not a good way to ensure the long term future of the business.
Last year IBM made over 10,000 employees redundant in the US - and transferred the jobs offshore. In the UK, IBM has been engaged in a Redundancy by Stealth programme, which has just recently been exposed in the UK Parliament. The recording of the debate is at:
and the transcript is at:
This shows that IBM UK staff have strong support in the UK Parliament, and there was very strong criticism of IBM UK's actions from MPs of all parties. It is now clear that IBM UK has been planning for some time to combine closure of the final salary pension schemes to existing members with a programme of redundancy by stealth aimed at staff over 50. Over 800 staff have been forced to 'volunteer' for early retirement, so leaving without any of the usual redundancy or early retirement packages. Some have already left, the remainder will leave in tranches over the next few months.
IBM UK has taken great care to keep within the letter of the law with these changes, but this debate shows that it has not avoided real damage to its reputation.
The Minister who replied to the debate can do very little to help, but she was very supportive to the employees and very damning of the comapany's actions. Her concluding words were:
"It is important that the IBM board looks at our debate today and that it takes due notice of the surprise, worry and anger that have been expressed. I have a great deal of sympathy with those feelings, which have been well reflected in the debate, and I hope that IBM will take note of them."
Good despite the resession however.......
......it remains to be seen how much of that good fortune will be shared with the employees who's hard work made all this possible and had to take the hit in cost cutting that drove the profits up.
That'll please those made redundant and the pensioners!