IBM profit steady amid revenue decline

The adverse economic conditions in the world and the tough times that have fallen on companies in the information technology sector have taken their toll

on IBM Corp, which yesterday reported profits of $2.3 billion in the fourth quarter of 2001, down 13% from last year, on worldwide sales of $22.8 billion,

down 11% -

Timothy Prickett-Morgan writes

.

After share buybacks, IBM was able to narrow the gap in earnings per share, with earnings of $1.33 a share, down 10%. Considering the severity with which IBM's competitors in just about all of the markets that it plays in have been hit, IBM's declining revenues and profits was a comparative party. And investors yesterday predictably drove up IBM's shares by 2.6% to just under $120.

For all of 2001, IBM's overall revenue declined by 2.9% to $85.9bn. Global Services revenues were up 5.4% for the year to $35bn, while hardware sales for the year declined by 11.6% to $33.4bn. IBM's Software Group sales were up modestly by 2.7% to $12.9bn, and Global Financing revenues were off 1.1% for the year to $3.4bn. Net income for the year was $7.7bn, down 4.6%, with PCs and OEM hardware together contributing more than $500m in losses for the year.

Earnings per share for all of 2001 were down 2% to $4.35. IBM chopped $1bn out of expenses in 2001, and says that it is on track to cut another $1bn from expenses in 2002.

IBM's chairman and CEO, Louis Gerstner, made what could be his final statement on IBM's revenues and earnings yesterday, trumpeting the fact that its "Regatta" pSeries 690 servers are sold out and that mainframe revenues grew for the first time since 1989.

The first isn't surprising, since IBM probably didn't expect to be able to build or ship many machines in the fourth quarter anyway, and the second is also not exactly surprising either since Amdahl and Hitachi have left the mainframe market, effectively leaving IBM with a mainframe hardware monopoly.

Gerstner, who could retire as early as March or April from the top IBM jobs, said that the company had over $15bn in new signings in its collective services businesses during the fourth quarter, once again emphasizing the engine for stability (but perhaps not profits) that those services units represent for Big Blue.

"We had our share of challenges, too," Gerstner admitted in his earnings statement. "But these were largely expected: slow PC sales and ongoing weakness in our OEM business. Our overall revenue decline came principally from these two units, and we've taken a number of actions to improve our long-term competitiveness in these areas."

Like everyone else in the business world, Gerstner would love to know how 2002 is going to turn out. And like other top execs who don't want to make promises they can't deliver on, Gerstner didn't really give a whole lot of guidance on how 2002 might turn out. "Business conditions remain difficult as we enter the new year, although we believe that our business will strengthen as we move through the year," he said.

"Further, and most important, we have absolutely no doubt that customer buying patterns throughout the world are continuing to shift in IBM's favor. Customers increasingly are demanding fully integrated technology - not the latest single-function offerings from the piece-part makers - and that plays directly to IBM's strengths."

Big Iron

IBM's hardware revenues were down 24% in the fourth quarter to $8.7bn. Revenues for zSeries mainframes were up a smidgen in the fourth quarter (but were up 15% for all of 2001). Mainframe MIPS shipments in the quarter were up 12% in the quarter. pSeries Unix server sales were up 35% sequentially from a dismal third quarter that was hit hard by the September 11 terrorist attacks and by over-capacity in the server market caused by the dot-com blowout. However, pSeries sales were off 20% compared to a very good fourth quarter of 2000, when IBM was shipping its "Turbo Condor" pSeries 680 servers at a healthy clip.

John Joyce, IBM's chief financial officer, said that the low-end and midrange Unix server lines experienced weak sales, but that IBM would nonetheless see market share gains in this part of the market because others have fared worse.

He also said that IBM would be introducing Power4 processors into low-end and midrange Unix servers later this year. In the quarter, sales of OS/400-based iSeries servers declined -Joyce didn't say by how much - but he said that the iSeries would gain market share in the midrange server market for machines costing between $10,000 and $1 million.

Intel-based xSeries server sales were down in the quarter as well, and Joyce didn't get specific about how bad, only saying that this was a market phenomenon, not something just affecting IBM. He added that storage arrays were a relative bright spot, with overall array sales up 2% in the quarter and high-end Shark array sales up 6%; he said the storage array market had declined by 20% in the fourth quarter.

PCs and printers

PC and printer sales were off 31% in the quarter to $2.9 billion, and it is no wonder that IBM wants to outsource the manufacturing of its NetVista desktop PCs to distance itself from the losses that inevitably result from such steep revenue declines. Only a low-cost manufacturer can stay alive in the mature PC market, and maybe not even then if somebody doesn't start making some money.

Software

IBM's software sales were off by 6% in the fourth quarter of 2001 to $3.8bn. Operating system sales were down 2% (at constant currency) and middleware and
database sales together were up 10%. Middleware and database sales on Unix and Windows platforms were up 5% in the fourth quarter according to Joyce, and host middleware sales - driven by database tools - were up 16%. IBM said that DB2 sales were up 13% in the quarter, and WebSphere middleware sales were up 43% (gain, these figures are at constant currency.)

Sales of Lotus messaging and Tivoli systems management software were both down in the quarter, but Tivoli's switch to point solutions like security applications from systems management frameworks has resulted in three quarters of sequential revenue growth. He declined to elaborate on how well or poorly Lotus did, but customers are clearly waiting to see the "Rnext" next-generation of the Domino software right now before they make any big deployments.

On a geographic basis, sales in the Americas were off 9% to $9.8bn in the fourth quarter. Sales in Europe, the Middle East and Africa were off 6% in the quarter, and sales in the Asia/Pacific region were off 10% to $4.5bn.

Disk Drives

Sales of technology to OEM customers - mainly custom chips and hard disk drives - were down 34% in the quarter to $1.6bn. IBM counts these sales separately in its geographic analysis because these OEM deals span geographies.

The sales slump here has been and will continue to be caused by the downturn in sales of PCs,servers, and networking equipment. Moreover, IBM has had bugs in some of the 10K RPM and 15K RPM disk drives it was trying to sell in 2001, which meant that IBM didn't sell nearly as many raw disk drives as it had hoped. The indications are that IBM has cleaned up many of these problems and could start shipping revamped products in volume by the end of the first quarter.

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