Technology sector bellwether IBM announced its fourth-quarter 2008 earnings, including a 12 percent increase in net income to $4.4 billion, up from $4 billion in the same period a year ago.
"A strong fourth quarter capped an outstanding year," Samuel J. Palmisano, IBM chairman, president and CEO, said in a statement. "In 2008, IBM performed well in an extremely difficult economic environment. Clearly our strategic transformation-migrating to the more profitable segments of the industry, investing in growth regions of the world and driving productivity through global integration-is continuing to pay dividends."
While net income rose, revenues for the quarter fell 6.4 percent to $27.01 billion. However, despite the decline in revenues, tax credits helped buoy net income for IBM, company officials said.
During a conference call with financial analysts, Mark Loughridge, IBM senior vice president and chief financial officer, said although revenue declined, growth came from "margin expansion." Moreover, Loughridge said, "To maintain leadership in the IT industry you need to continue to innovate and reinvent yourself." And, indeed, IBM has done that with its continued shift in business to services and software.
Loughridge said, "80 percent of segment profit came from services and software. So we have changed the business."
Revenues from the software segment were $6.4 billion, an increase of 3 percent. Revenues from IBM's middleware products, which are primarily WebSphere, Information Management, Tivoli, Lotus and Rational products, were $5.2 billion, up 4 percent from the fourth quarter of 2007. Revenues for WebSphere decreased 1 percent, while revenues from Information Management software, which enables clients to leverage information on demand, increased 18 percent. Revenues from IBM's Tivoli software decreased 4 percent, and revenues from Rational software decreased 1 percent. Also, operating systems revenues of $622 million decreased 6 percent compared with the prior-year quarter.
"As I look forward, we ought to be able to maintain the ramp of profitability in the software business," Loughridge said. "We've been investing heavily in our software business," he added later, noting the software company acquisitions IBM has made in the software arena over the last year.
Eugene Zakharov, senior analyst of Professional Services for Technology Business Research, said, "IBM is clearly a fundamentally different company compared to several years ago: The company has successfully steered away from cyclical and commoditized products, the company focused on software and services. Roughly 90 percent of IBM's profit comes from software, services and financial services, all of which proved to be resilient and attractive in this downturn."
Meanwhile, total IBM Global Services revenues decreased 4 percent, IBM said. The company's Global Technology Services segment revenues decreased 4 percent, and Global Business Services segment revenues decreased 5 percent. Also during the quarter, IBM signed services contracts totaling $17.2 billion, including 24 contracts greater than $100 million, Loughridge said.
Revenues from the Systems and Technology segment totaled $5.4 billion for the quarter, down 20 percent, the company said. Systems revenues decreased 18 percent. Revenues from System z mainframe server products decreased 6 percent compared with the year- ago period, the company said.
Overall, Loughridge said IBM "had a pretty good year" in terms of its mainframe business. "As I look forward and look at the ability of the mainframe to satisfy customer requirements, there is still room for growth."
However, "2009 will no doubt present a challenging economic environment," Loughridge said. Yet, "We've transformed this business to be more adaptable and provide revenue growth. We've changed the mix of this business with greater emphasis on software and services ... I really like our hand."
Loughridge said IBM is poised to "come out stronger as things improve" and that IBM sees opportunities in delivering "smart infrastructure" components for things like next-generation smart grids, health care IT and the continued proliferation of broadband.
"IBM really likes its hand and the company is upbeat about its opportunities in 2009 and its ability to continue performing well even in light of continuing pressures on IBM's top line," Zakharov said.