IBM profits out-climb sales in Q1

UK soars like a BRIC

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Maybe the worst of the economic meltdown is over, even if we still need to send some people who helped create it to jail. After Wall Street closed today, IBM reported its financial results for the first quarter of 2010, and in just about every product category and geography, Big Blue showed sequential growth at constant currency. That helped push sales up 5 per cent compared to a pretty awful first quarter of 2009, to $22.9bn, and net income up 13 per cent, to $2.6bn.

Mark Loughridge, IBM's chief financial officer, was not tempted by analysts to call an end of hard times, but IBM does feel confident enough about 2010, based on the first quarter, to raise its profit guidance for the full year to $11.20 per share, up 20 cents from prior guidance.

Loughridge said that IBM ran a lot of difference scenarios to come up with this number, as the company's financial wizards always do, but it's the good growth in consulting signings (which IBM considers a leading indicator for future IT spending) and the relatively high growth in software sales (which are IBM's most profitable products) that's pushing the profit predictions upwards.

Loughridge gave a shout out to the United Kingdom, which had an 8 per cent increase in revenues for the quarter compared to Q1 2009, the best growth among the G7 economies and shooting up almost like one of the BRICs. (OK, not really. IBM had a combined 14 per cent revenue growth in Brazil, India, Russia and China lumped together. But in the UK and the rest of Europe and North America, 8 per cent growth feels like twice that since it so rarely happens any more). Revenue in the Americas increased by 6 per cent, year-on-year. Europe grew 5 per cent. And Asia/Pacific grew by 4 per cent.

IBM is mostly a services company with hardware and software pretensions - or a systems company that makes a fortune selling services that ought to be part of the system but are not, depending on how you want to look at it - and the Global Services behemoth accounted for $13.7bn in sales, up 4 per cent as reported in US dollars but down 2 per cent at constant currency.

Global Technology Services - which includes outsourcing, integrated technology services, and product maintenance - accounted for $9.3bn in sales, up 6.3 per cent, while Global Business Services - which sells a whole bunch of highfalutin business transformation and optimization services - posted sales of $4.4bn, up three-tenths of a per cent. Gross profits for both services realms improved, and at constant currency, the aggregate services business grew by a modest 3 per cent compared to the fourth quarter.

IBM had a services backlog of $134bn as the first quarter came to a close, up $8bn compared to a year ago, and it did $12.3bn in new contract signings, down 2 per cent thanks to an unexplained plummet in application management services signings. Consulting signings were up 18 per cent in the quarter, which has Big Blue feeling pretty chipper about the future.

Software Group, which sells operating systems, middleware, and other system and application software that is used by companies and ISVs to support their own applications software, grew by 10.6 per cent year-on-year, to a hair over $5bn, and with gross profit margins of 84.6 per cent, this business has IBM feeling downright ecstatic. Nearly all of that extra money does right to the bottom line, which it can use to buy back shares to prop up EPS numbers, which in turn pump up the stock and make IBMers who have lots of stock richer. All told, the WebSphere, DB2, Tivoli, Lotus, and Rational product sets accounted for 56 per cent of software sales, and the first three areas showed double-digit revenue growth compared to Q1 2009. Operating system sales accounted for about 10 per cent of the Software Group pie, with other middleware, mainly rented mainframe software, made up another quarter of the pie.

In the Systems and Technology Group - which makes chips, servers, and storage - sales were up 5 per cent, to $3.4bn. Everyone knows the System z11 mainframes are coming in the second half of the year, and Loughridge finally copped to it being later rather than sooner in 2010 (in case you were thinking there might be announcements in the first half). Similarly, while the Power7 chips are out in midrange and now blade servers, IBM still needs to get them into entry boxes and high-end iron. The big Power7 boxes are not expected until the fall, perhaps September or October, if the rumors are right. Loughridge confirmed the big Power7 machine, presumably to be called the Power 795, will come out in the second half of this year.

So, with those product transitions, it was no surprise at all that System z mainframe sales fell by 17 per cent and aggregate computing capacity shipped, as measured in MIPS, fell by 19 per cent. It was also no shocker that Power Systems revenues fell by 17 per cent with new midrange machines only shipping for a few weeks in the quarter and blades not announced until after the quarter ended.

But System x and BladeCenter sales helped fill in the gap, shooting up 36 per cent as IBM moved a lot of machinery. This was the fifth consecutive quarter of share gains for IBM's x64 server biz, and it had some really bad quarters to make the compares easy. Loughridge said that an "improved sales model" and "enhanced product offerings" were what drove x64 server growth in the quarter, which could mean just about anything but perhaps simply means IBM is giving its channel partners better sales leads and higher margins to push its tin instead of Hewlett-Packard's.

It probably means IBM is making more of its gear in China and splitting the difference with partners. Blade server revenues were up 55 per cent in the quarter; IBM didn't say how bad off BladeCenter sales were a year ago, but it did say in Q1 2009 that overall System x sales fell by 27 per cent. So the compare is probably pretty easy, and yet there has to be some real growth going on here, too.

Storage sales within Systems and Technology Group were up 11 per cent year-on-year, with disk sales across all products up 18 per cent and double-digit growth across entry, midrange, and high-end products. IBM said it added 75 customers for its XIV clustered storage arrays during the quarter, and storage software across all arrays rose by 14 per cent. Tape product sales declined by 5 per cent, but IBM believes it nonetheless gained market share against its peers.

IBM said that its Microelectronics unit had a 16 per cent increase in revenues, with the 300mm wafer baker in East Fishkill, New York, running at near full utilization and its 45 nanometer output sold out again for the quarter as it was in Q4 2009.

IBM generated $1.4bn in free cash for the quarter, shelled out $4bn to buy back about 2 per cent of its outstanding shares, spent $700m in dividends, and still had $14bn in cash in the bank. IBM has $22.6bn in debt, with about $4.1bn of that being money it owes a bank somewhere and the remaining money going to support its equipment financing activities for resellers and customers. ®

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