As IBM indicated a week before in announcing preliminary earnings, the company had a solid third quarter, with revenues up 5 percent and profits up 20 percent over the same period a year ago. However, it was not so much what the company said about its current financial results during its Oct. 16 earnings call, but what it said about why IBM’s outlook will remain strong during the economic crisis that bears the attention of the tech sector.
During the IBM earnings conference call, Mark Loughridge, IBM’s senior vice president and chief financial officer, said there are at least three things fueling IBM’s ability to weather the storm. One is that IBM has “confidence in the short-term signings profile and how that’s going.” Indeed, Loughridge said short-term signings for IBM’s services business were up 8 percent and in the United States up well beyond that.
Second, IBM does not pursue deals that expose the company to risk. “We have confidence in the quality of the deals we’ve signed,” Loughridge said. And, third, IBM has continued to work to “take cost out” of its entire operation, from production to supply chain to distribution-all across the board.
However, Loughridge drove home the point that perhaps the main thing buoying IBM during the financial mess is “we have a manageable level of exposure to financial institutions” involved in the crisis. Indeed, in the financial services industry, Loughridge said, “the amount of revenue IBM generates from these institutions is only about 1 percent” of IBM’s overall revenue. Moreover, in general, IBM draws only 7 percent of its overall revenue from the financial services sector, Loughridge said. So IBM’s exposure is minimal, he said.
And despite the fact that periods of economic turbulence provide opportunities for services deals with customers “looking for ways to reduce cost, reduce capital or just to survive,” some of those opportunities are “not worth the risk,” Loughridge said.
“IBM’s portfolio of services, software and hardware helps its clients ride out the wave of turmoil by providing cost-cutting or outsourcing solutions or offering strong revenue generation opportunities through consulting and systems integration,” said Eugene Zakharov, senior analyst of professional services at Technology Business Research. “By focusing on business outcomes, IBM has its skin in the game and is able the make its story very appealing to clients who can be going through tough times.”
In addition, Loughridge said IBM’s own Global Financing arm, which is used to facilitate enterprise client acquisition of hardware, software and services, is itself insulated from the credit mess. “We have a rock-solid booking business and a very solid customer base,” he said. Moreover, Loughridge said 97 percent of IBM Global Financing’s portfolio is in its core competency of technology financing and has no exposure to consumers or mortgage lending.
Software and Services Lead the Way
Meanwhile, once again, software and services led the way for IBM’s growth in the quarter. “Software had the best growth rate,” at 12 percent earnings growth and 19 percent income for the quarter, Loughridge said. “Services drove us to good performance, there was strong demand for high-end systems, and global financing was up 6 percent,” he said.
“Demand continues for software products that that deliver short-term return, like virtualization,” Loughridge said.
Loughridge also said that during a weekend meeting with IBM general managers, Steve Mills, senior vice president and general manager of the company’s software business, said this is the best pipeline he’s ever had for software. “And this quarter … if you look at the pipeline, there’s a chance for software to have double-digit growth again,” he said.
Revenues from the IBM Software segment were $5.2 billion. Revenues from IBM’s total middleware products, which primarily include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $4.1 billion, up 12 percent versus the third quarter of 2007, IBM officials said. Operating systems revenues of $594 million increased 5 percent compared with the prior-year quarter.
For the WebSphere family of software products, which facilitate customers’ ability to manage a wide variety of business processes using open standards to interconnect applications, data and operating systems, revenues increased 4 percent, the company said. Revenues for Information Management software, which enables clients to leverage information on demand, increased 26 percent. Revenues from Tivoli software, infrastructure software that enables clients to centrally manage networks including security and storage capability, increased 2 percent, and revenues for Lotus software, which allows collaborating and messaging by clients in real-time communication and knowledge management, increased 10 percent year over year. Revenues from Rational software, integrated tools to improve the processes of software development, increased 23 percent compared with the year-ago quarter, IBM said.
Total IBM Global Services revenues grew 8 percent, the company said. Global Technology Services segment revenues increased eight percent to $9.9 billion, with strong growth in Integrated Technology Services. And the company’s Global Business Services segment revenues increased 7 percent.
On the hardware side, “System z continues to sell very well in a tough environment” because of its ability to subsume the workloads of several servers into one, Loughridge said.
However, revenues from the Systems and Technology segment, which totaled $4.4 billion for the quarter, were down 10 percent. Yet, revenues from IBM System z mainframe server products increased 25 percent compared with the year-ago period, with double-digit growth in all geographies, the company said.
Overall, despite the turbulent financial times, IBM is positioned to ride things out with a mix of protections, Loughridge said. “This is a tough market,” but IBM is ready for it, he said.
For his part, Samuel Palmisano, IBM’s chairman, president and CEO, in a statement, said:
““Our results demonstrate that the combination of a steady base of recurring revenue and profits, a range of products and services that deliver value to clients worldwide, and a strong and flexible financial foundation give IBM a competitive edge in good times and tough times.” “