IBM Strong Q4 to Spur 2008 Growth

By Darryl K. Taft  |  Posted 2008-01-18

IBM Strong Q4 to Spur 2008 Growth

IBM announced strong fourth quarter earnings led by its global business, particularly in Asia, Europe and emerging markets, signaling a bright outlook for the systems giant despite a potential slowdown in the United States.

For its fourth quarter of 2007, which ended Dec. 31, 2007, IBM announced earnings of $28.9 billion, a 10 percent increase over the same period in 2006. Moreover, the financial results announced on Jan. 17 showed record revenues for software. IBM had software revenues of $6.3 billion, an increase of 12 percent over the same period in 2006.

However, although overall revenues were up 10 percent, revenue in the United States was up only 2 percent, Europe/Middle East/Africa was up 16 percent to $10.8 billion, and Asia revenues were up 15 percent to $5.5 billion. In Asia, Japan had a particularly strong showing, with revenue growth of 20 percent over the same period a year ago.

"IBM had a terrific fourth quarter and full year with record revenue, profit and cash," said Samuel J. Palmisano, IBM chairman, president and chief executive officer, in a statement. "The broad scope of our global business -- led by strong operational performance in Asia, Europe and emerging countries -- as well as continued growth in services and software drove these outstanding results."

With overall software revenues up 12 percent, revenues from IBM's middleware products, which primarily include IBM's WebSphere, Information Management, Tivoli, Lotus and Rational products, were $5 billion, up 13 percent versus the fourth quarter of 2006, the company said. WebSphere revenues grew by 23 percent, Tivoli grew 19 percent, IBM's Information Management solutions grew 11 percent, and Lotus solutions for collaboration, messaging, real-time communications and knowledge management grew 7 percent. In addition, revenue from IBM's developer tools group, the Rational division, grew 22 percent, said Mark Loughridge, IBM's chief financial officer, during a call with analysts.

Allan Krans, an analyst with TBR (Technology Business Research), said IBM remains the second-largest software vendor, but faces mounting threats in an increasingly competitive market. "The greatest threat to IBM's position in the enterprise software market is Oracle, which is rapidly growing revenue through acquisitions and cross-selling middleware, database and business application products."

Krans said Oracle surpassed IBM Software in terms of revenue during 2007, reporting total revenue of $20.08 billion compared with IBM Software's total annual revenue of $19.98 billion. Yet, "IBM retains a significant advantage in terms of software-only revenue, however, as Oracle's total revenue for 2007 drops to $15.9 billion when professional services are excluded."

Moreover, Krans said IBM is becoming increasingly dependent on software for both growth and profitability, "and significant investments have been made in the software business in order to ensure the positive contributions to corporatewide results continue. IBM may not be able to match the acquisition and applications-fueled growth rates reported by Oracle, but TBR believes the targeted R&D investments in SOA [service oriented architecture], combined with acquisitions to solidify its software portfolio."

Thinking Big and Small

Meanwhile, as services remain a core driver of IBM's revenue, global services grew 17 percent. Global technology services grew 16 percent to $10 billion and global business services, including consulting and application management services grew 17 percent to $.9 billion.

However, IBM's systems and technology revenues were down by 4 percent.

Josh Farina, another analyst with TBR, said he thinks IBM feels the need to get closer to its customers after two straight quarters of hardware revenue declines. "The company is aiming to leverage tighter sales relationships with its large enterprise customers, but also talk the talk with small and medium-sized businesses in an effort to pump up sales of everything from its System z mainframes to its System x servers," Farina said.

Earlier this month, IBM announced a restructuring of its Systems and Technology Group (STG) to deliver a segmented approach to how the company sells hardware. IBM restructured the group into four segments: Enterprise Systems, Business Systems (SMB), Industry Systems and Microelectronics. "The reorganization is particularly important to IBM as the company seeks to increase its SMB market share, particularly in emerging geographies, where IBM and HP continue to vie for market share," Farina said.

Yet, "TBR believes IBM has its work cut out for it as its revenue decline came from factors including weak System z sales, weak microelectronics results and was also impacted by lost revenue after the sale of IBM's printer business," Farina said.

IBM's strong fourth-quarter showing leaves the company with a rosy outlook for 2008.

"As we begin 2008, IBM is well-positioned as a result of our global business reach, solid recurring revenue and profit streams, and strong financial position," Palmisano said in a statement.

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