IBM's Q4 2010 Profits Driven by Hardware, Software, Growth Markets

IBM saw fourth-quarter profits rise 9 percent on the strength of systems, software and growth markets.

Announcing its fourth-quarter 2010 earnings on Jan. 18, IBM said fourth-quarter net income was $5.3 billion, compared with $4.8 billion in the fourth quarter of 2009, an increase of 9 percent. Total revenues for the fourth quarter of 2010—of $29.0 billion—increased 7 percent from the fourth quarter of 2009.

"We completed an outstanding year, with record profit and free cash flow, and exceeded the high end of our 2010 earnings per share roadmap objective," said Samuel J. Palmisano, IBM chairman, president and chief executive officer, in a statement. "We also capped a decade in which our shift to high-value businesses, our global integration of IBM, our investment in research and development of almost $60 billion and our acquisition of 116 companies have helped us to nearly triple our EPS and return more than $100 billion to shareholders.

"As IBM enters its second century, we will continue to focus on our long-term strategic initiatives—growth markets, Smarter Planet Solutions, cloud and business analytics—as we drive to achieve our new roadmap target of operating earnings per share of at least $20 in 2015."

During a call with analysts to discuss IBM's earnings, Mark Loughridge, senior vice president and chief financial officer of Finance and Enterprise Transformation at  IBM, said, "Systems and Technology had fantastic performance, with 21 percent growth. We had growth in every platform, but the most impressive growth was in our System z mainframes, which were up almost 70 percent."

Revenues from the Systems and Technology segment totaled $6.3 billion for the quarter.

Loughridge added that "Systems and Technology was up 22 percent at constant currency, with growth in every platform, and particularly strong performance in our System z mainframe. Our software revenue was up 12 percent at constant currency without the divested PLM [Product Lifecycle Management] operations."

Moreover, from a geographic perspective IBM's major market revenue growth was 5 percent at constant currency, led by the United States, France and Italy, Loughridge said. Yet, "Our growth markets revenue was up 13 percent at constant currency. Business analytics, another of our key growth initiatives, was up 19 percent."

For his part, Loughridge said for the full year of 2010, the growth markets were up 11 percent and outpaced the major markets by 10 points, faster than the company saw in both 2008 and 2009. "The combined revenue in the BRICs [Brazil, Russia, India and China] was up 17 percent, with growth in each of the four countries, and particularly strong growth in China, which was up 25 percent, and Russia, up 46 percent," Loughridge said. "Our growth markets performance was broad-based; with double-digit growth in 50 growth market countries, up from 32 last quarter."

"IBM has leveraged its large scale and its established global brand to drive growth in emerging markets," said Greg Richardson, an analyst with Technology Business Research. "While other companies put their emerging market strategies in the backseat during the economic downturn of 2008 and 2009, IBM was steadfast in its investments in growth markets."

In the software arena, IBM saw strong performance in its key middleware brands, Loughridge said. WebSphere was up 32 percent year to year; Tivoli was up 12 percent, Rational was up 10 percent, and Information Management was up 10 percent. Lotus revenues decreased 3 percent. Overall, revenues from IBM's key middleware products were $4.7 billion.

"And we continue to add to IBM's capabilities," Loughridge said on the call with analysts. "With the acquisition of Netezza, we can extend the value of business analytics to both large enterprises and smaller clients, with a system that's simple, economical and offers quick time-to-value. Netezza is a leading provider of high-performance analytics appliances that can be up and running in a matter of hours, handling complex analytical queries 10 to 100 times faster than traditional systems. It helps clients gain faster insights into their business information, with increased performance at a lower cost. Netezza got off to a strong start this quarter, and complements IBM's Business Analytics and Optimization capabilities."

Also on the analytics side of things, IBM's Global Business Services unit saw its business analytics revenue rise over 40 percent. "We've now added over 4,000 consultants in 2010, and now have over 7,800 dedicated consultants in our business analytics practice," Loughridge said.

Revenues from the company's business analytics operations across services and software segments increased 19 percent, IBM said.

"IBM is pulling together a diverse set of capabilities—like only IBM can—to put behind its Analytics strategy," TBR's Richardson said. "IBM is utilizing its Analytics capabilities in software and services to better position its systems offerings, including in cloud infrastructure." In addition, he said, "TBR expects IBM to utilize Analytics as a means to extend its reach from IT departments to line-of-business managers."

On a year-to-year basis, overall net income for the year ended Dec. 31, 2010, was $14.8 billion, compared with $13.4 billion in the year-ago period, an increase of 10 percent.

In summary of IBM's fourth-quarter 2010 results, Richardson added: "IBM is leaning on its Smarter Planet and Analytics strategies to generate demand for IT infrastructure as tools to manage social needs, such as energy, banking and rail, in high-growth cities. As a result of past efforts and a forward-looking strategy, IBM is developing a 'play book' of best practices for developing Smarter Cities in Growth Markets. Currently, IBM is leveraging this strategy in 250 cities worldwide, and is targeting penetration of 500 cities by 2015. By expanding its presence in the core infrastructure of developing cities and regions, TBR believes IBM is aiming to gain a toehold in the regions by becoming an established, household name."