Original URL: http://www.theregister.co.uk/2010/01/20/ibm_q42009_numbers/

Big Blue boosts profits despite sales slump

x64 turnaround

By Timothy Prickett Morgan

Posted in Financial News, 20th January 2010 00:11 GMT

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.

Software sales up (a bit)

Software Group - which is the profit engine for IBM thanks in large part to those monthly maintenance fees for mainframe operating systems, middleware, and other systems programs - had a few big deals slop over into the first quarter, which is why sales were only up 2.4 per cent to $6.6bn.

The Lotus messaging and groupware products saw a 5 per cent decline, and Rational development tools were down 4 percent as well. But the WebSphere family of middleware had a 13 per cent increase in sales in Q4 and gained market share according to Loughridge's estimation, and IBM's database and related tools (which it lumps into the "information management" category) had a 7 per cent revenue boost. So did the Tivoli Systems management tools. Despite the ever-changing product mix, IBM was able to keep the pre-tax margins in Software Group at 87.7 per cent of revenues.

IBM still sells machinery for part of its living. But with Global Services and Software Group each garnering 42 percent of Big Blue's profits, the Systems and Technology Group is pushed to the back of the financial presentations these days even though the systems are the foundation upon which those profits are derived. Anyway, the Systems and Technology Group - which sells servers, storage, chips, and intellectual property - posted $5.2bn in sales, down 4.3 per cent.

Loughridge said that part of the problem was impending Power Systems and System z mainframe announcements in 2010. He also said that the systems market had bottomed out in the second quarter of last year and that the rate of decline had been improving as 2009 rolled on.

Loughridge said the System z mainframe line stomached a 27 per cent revenue hit, with aggregate mainframe processing capacity shipped (expressed in MIPS) down 19 per cent in the quarter. "This is consistent with what you would expect at this point in the product cycle," he explained.

Sales of Power Systems machines, which include boxes running AIX, Linux, and i/OS, had a 14 per cent decline in the quarter. But IBM believes that despite this decline, IBM gained four points of share in the Unix racket. In fact, Loughrige said, IBM booked nearly 200 Unix competitive takeouts in the fourth quarter, raking in almost $200m, and for the full year, it did more than 500 takeouts that generated more than $600m in sales.

The System x server business was up like a rocket for IBM in the quarter, with sales up 37 per cent thanks in large part to some awful compares and the "Nehalem EP" Xeon 5500 processors from Intel. BladeCenter blade server sales were up 56 per cent, according to Loughridge, which is an astounding reversal for Big Blue.

The Xeon 5500s launched in March 2009 and ramped up through the summer and that certainly helped. No doubt so did the improved sales model that Loughridge said IBM implemented. But it is a safe guess that IBM's large enterprise customers slammed the brakes on x64 server spending in late 2008, causing its x64 biz to go into a tailspin, and it looks like they hit the gas in late 2009.

Storage sales, which are part of the Systems and Technology Group, were up only 1 percent in the quarter, but IBM's disk array sales were up 6 per cent and the company believes it gained some share thanks to growth in the midrange DS lineup and with the XIV clustered storage products, the latter of which had 130 new customers in Q4 and over 400 since IBM bought the company.

Tape drive and library sales fell 10 per cent, but IBM thinks it gained some of the market pie here too. On the Microelectronics front, chip sales were up 2 per cent in the quarter, and Loughridge said that the 300mm wafer baker in East Fishkill, New York was nearing full utilization and that 45 nanometer output was sold out again this quarter. No doubt some of that wafer baking capacity is being pressed into action to crank out Power7 chips and probably the z11 mainframe engines too. ®