IBM tops earnings targets

Big Blue beats Wall Street's fourth-quarter expectations with earnings of $1.34 per share, a result of strong services business.

Ed Frauenheim Former Staff Writer, News
Ed Frauenheim covers employment trends, specializing in outsourcing, training and pay issues.
Ed Frauenheim
3 min read
IBM on Thursday beat analyst expectations for the fourth quarter on the strength of strong services revenue.

The computing giant recorded income from continuing operations of $1.9 billion, including $405 million of net charges for the quarter. Earnings from continuing operations were $1.34 per share, excluding charges. The charges amounted to 23 cents per share.

Fourth-quarter revenue from continuing operations reached $23.7 billion, up 7 percent year-over-year.

Analysts polled by First Call on average had been expecting IBM to post operating earnings of $1.30 per share and revenue of $23.2 billion.

Revenue from IBM's global services unit rose 17 percent year-over-year to $10.6 billion. The company attributed the growth to its acquisition of consulting and technology services company PwC Consulting last year.

"In one of the most challenging years in business, we delivered a solid quarter and finished the year strong. We continued to gain share in our core businesses and managed our company very well in a tough environment," CEO Sam Palmisano said. "At year end, IBM's financial position was strong enough for us to take the important step of fully funding the U.S. pension plan."

Palmisano noted that the company had strengthened its software offering through a number of acquisitions, and said the integration with PwC Consulting is on track.

In a conference call, IBM Chief Financial Officer John Joyce said the company was comfortable with analyst expectations for the current quarter of 9 percent earnings-per-share growth and nearly 10 percent revenue growth, both year-over-year.

However, a consensus of analysts polled by First Call put earnings at 80 cents per share for IBM's March quarter, or growth of 9.6 percent year-over-year. In addition, the average revenue estimate for the quarter was $19.8 billion, up 10.1 percent year-over-year.

Joyce said IBM can grow revenue and earnings for the full year even if overall IT spending levels fail to improve. But to achieve expectations of full-year revenue growth in the high single digits and earnings growth of 10 percent, Joyce hinted that IBM would need to see higher IT spending.

Despite exceeding analyst expectations in the fourth quarter, IBM's earnings per share from continuing operations fell by 8.2 percent year-over-year. In the year-ago quarter, the company reported $2.6 billion in income from continuing operations, or $1.46 per share.

For the full year 2002, IBM posted revenues of $81.2 billion, down 2.3 percent year-over-year, and earnings from continuing operations of $5.3 billion, down 34.5 percent year-over-year.

Under Palmisano, who took the reins of the company last spring, IBM has been promoting what it calls "on demand" computing. The on-demand initiative focuses on building larger, more reliable computer networks that let companies buy computing power as a service or a utility, in the same way those companies purchase electricity.

IBM is also realigning existing product and services offerings around the initiative. The computing giant has established an On-Demand group and committed $10 billion to bringing the initiative to fruition through research and development, acquisitions and various company programs.

IBM also continues to focus on services products. Having acquired PwC Consulting last year for $3.5 billion, IBM now trumpets its ability to help businesses run more efficiently through a combination of management advice and technology.

The global services unit signed more than $18 billion of business in the fourth quarter, IBM said. In late December, IBM announced a 7-year contract with J.P. Morgan worth more than $5 billion. Under the deal, the financial services giant will outsource to Big Blue a significant portion of its data processing technology infrastructure, including data centers, help desks, distributed computing, data networks and voice networks. Earlier in the month, IBM announced a 10-year, $2.5 billion contract to run Deutsche Bank's data centers in continental Europe.

Although hardware sales still account for about a third of IBM's revenue, the company has been moving away from the business of actually making computer devices. It sold off its money-losing hard disk drive business to Hitachi last year and recently announced it signed two contracts worth a total of $3.7 billion to outsource manufacturing operations. According to the deals, outsourcer Sanmina-SCI will acquire IBM manufacturing operations in Mexico and Scotland, while Solectron will take over a facility in North Carolina that restores previously leased PCs and other information technology equipment.

IBM also has axed employees to improve its profitability. Last year, it announced plans to eliminate 15,613 jobs, about 5 percent of the roughly 300,000 people IBM employed at the beginning of 2002.