IBM on 2009: Yes we can

Even as hardware sales slump, the company gets a fourth-quarter lift from software, services and financing. Wall Street relieved as Big Blue issues improved 2009 guidance

IBM

As earnings reports roll in, it's clear that 2008 will go down in the record books as a miserable year for most companies. But IBM bucked the trend, putting a coda on the year with a strong fourth quarter.

The question now is whether the company can manage itself successfully past what the wags now commonly refer to as the "econolypse." For the time being, at least, IBM's response is a measured yes.

The slump in corporate technology spending has pressured companies throughout the IT world, and IBM is no exception. The company anticipates hardware revenue will be down through the first three quarters of the year, but with 90 percent of IBM's profit deriving from software, services and financing, Chief Financial Officer Mark Loughridge said, "we do think we can manage through that quite successfully."

IBM posted fourth-quarter net income of $4.4 billion, up 12 percent from the same period one year earlier. Revenue fell 6 percent to $27 billion. After adjusting for currency, IBM said that revenue decreased 1 percent.

Gross profit margins rose to 47.9 percent from 44.9 percent, a reflection both of IBM's cost cutting focus as well as the mix of revenues, which featured more higher margin services and software contracts.

Wall Street's initial reaction was positive. After selling off during Tuesday's regular session, shares of IBM rallied about 4 percent in after-hours trading.

With the Obama administration planning a major stimulus package, many companies are banking on increased demand in the second half of the year. Similarly, Loughridge said that IBM expected greater levels of investment to result in an improved second half of 2009.

IBM is projecting full-year earnings of at least $9.20 a share. That should please investors as Wall Street was looking for $8.75 a share. But the company does not expect accelerating revenue growth from its traditional bread-and-butter businesses. Rather, IBM is counting on reaching its goal through margin expansion and better cost containment.

Starting in the Lou Gerstner era, IBM reshaped its business to feature software, services, and financing. That's been a good bet as those are the businesses that are holding up better than Big Blue's computer hardware business, which fell 20 percent in the fourth quarter of last year.

During the course of a conference call with analysts on Tuesday afternoon, Loughridge said IBM planned on taking "cost initiatives" throughout the course of the next 12 months, but did not get more detailed.

Still, he added that IBM had "a very good hand to play in 2009."

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About the author

Charles Cooper was an executive editor at CNET News. He has covered technology and business for more than 25 years, working at CBSNews.com, the Associated Press, Computer & Software News, Computer Shopper, PC Week, and ZDNet.

 

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