System iNetwork

January 21, 2009

IBM Comes Out on Top in Fourth Quarter--and the Year

Surprising Wall Street, IBM reported better-than-expected results for its fourth quarter of 2008 and the year. Hardware sales dropped in the fourth quarter, but services and software picked up the slack. In 2008, IBM's pre-tax profit was $16.7 billion, and over 90 percent of its segment profit came from software, services, and financing.

"You can see that 40 percent of our profit came from our software business, and 42 percent from services, while hardware contributed just 9 percent," Mark Loughridge, senior vice president and chief financial officer, said in IBM's webcast for investors yesterday.

"This really illustrates how our business has changed over time as a result of our significant portfolio actions and targeted investment strategies, as we shift to where we see the best long-term opportunity," he added.

Results in a Tough Environment

Despite the economy, IBM appeared bullish over its 2008 year and its 2009 forecasts. For 2008, revenue was $27 billion, down 6 percent (1 percent at constant currency). Still, IBM delivered $3.28 of earnings per share, up 17 percent year to year.

"Let me tell you how we've been able to achieve these results in a tough environment," Loughridge said.

"We had relatively stable revenue performance--by delivering what customers need in this environment. So for the customers that are trying to save cost and conserve capital, we can adapt our offerings to help them do that," he explained.

Basically, while customer companies are trying to trim costs and reduce their operating budgets, IBM has been able to sell services and solutions that quickly cost less. In the fourth quarter, IBM's Strategic Outsourcing signings were up 34 percent in the U.S. and up 66 percent in Europe. Plus, IBM is focusing on customers and business segments that produce higher profits.

"We signed 24 [Global Services] deals larger than $100 million, and that's the highest number we've seen in quite some time," Loughridge said.

Software Up, Hardware Down for the Quarter

For the quarter, software revenue of $6.4 billion was up 3 percent year to year, or 9 percent at constant currency. Loughridge said WebSphere, Information Management, Lotus, and Tivoli software sold well.

Systems & Technology revenue of $5.4 billion was down 20 percent year to year, or 16 percent at constant currency.

"Our system z and converged system p servers did well, but our x86 platform declined. In this tough macro-environment, customers are focused on reducing the cost of running their IT infrastructure," Loughridge said.

"Virtualization, which provides the ability to run multiple workloads on a server, is a key enabler of efficiency. System z is the ultimate platform for virtualization, able to support thousands of images and run fully utilized. Our POWER architecture supports hundreds of partitions, often driving utilization rates of over 60 percent. Both of these platforms leverage the entire system, from their custom semiconductors right through the software stack, to achieve these high levels of efficiency, and lower cost of ownership," he explained.

System z revenue declined 6 percent but MIPS grew 12 percent.

Converged System p delivered 8 percent revenue growth (14 percent at constant currency).

"This is the tenth consecutive quarter of year to year revenue growth. The energy efficiency and multi-operating system capabilities of POWER6 technology continues to resonate with customers. Coupled with exceptional performance, POWER6 is the right solution for a multitude of workloads. The result is strong performance in both high-end and midrange servers, both growing 16 percent at constant currency," Loughridge noted.

Storage revenue declined 20 percent. Disk was down 16 percent, and tape declined 31 percent. System x server revenue declined 32 percent, with blades down 27 percent.

"This reflects a significant slowdown in the x86 market, as customers are virtualizing and consolidating workloads into more efficient platforms such as POWER and mainframe," Loughridge said. "So as you look at these results, you can see that the industry standard hardware is clearly more susceptible to an economic downturn."

No i?

Loughridge didn't call out IBM i, but the IBM press release for the financial results briefly noted that "revenues from the legacy System i servers decreased 92 percent." This is obviously the older System i boxes still selling, and based on how IBM is reporting its numbers, entirely expected. IBM i-based POWER6 systems now fall under the converged System p category.

Layoffs?

Layoffs have been looming for most tech sector companies, and IBM is no exception. The New York Times reported that IBM CEO Samuel J. Palmisano, in an internal email to employees, said layoffs were not the company's current strategy.

Still, IBM regularly lays off workers in underperforming segments, but in recent years has also continued to hire new employees. Alliance@IBM, which is the official national site for the IBM Employees' Union, has a Job Cut Status message board that urges IBM employees to post news and information regarding staff cuts. There's been a lot of chatter of late, and it's hard to say what's accurate and what's overblown.

One apparent IBM employee posted: "Rational is laying off workers. Just got a call from my manager saying that 1) there is a layoff in progress; and 2) I'm not getting laid off."

Another wrote: "World Wide Software Marketing Teams are getting the calls today. Preparing for a blood bath. Will post more detail as them become available."

And here's more: "How can IBM achieve $9.20 per share more than analysts are expecting in 2009?. It is possible by trimming work force in USA and outsourcing. See how confident IBM is."

Posted by cmaxcer at January 21, 2009 9:49 AM