IBM Corp reported on Tuesday that it had solid profit growth in the fourth quarter, as the company's aggressive cost cutting continued to bear fruit. Profits grew 13 percent for the quarter, despite fairly tepid sales growth, easily surpassing Wall Street estimates.
Because IBM is the largest information technology firm in the world, its earnings are closely monitored by investors, especially now, when many analysts have been counting on strong results from large companies to propel the stock market upward this year. And as other closely watched technology stocks like Intel Corp and Yahoo Inc plunged on Tuesday, IBM's slow but steady results found favor and its stock held firm at US$83 in after-hours trading.
The respectable results cap an eventful year for IBM. In the last year, the company exited its personal computer business, laid off 14,500 employees and made a substantial break with its paternalistic past by announcing that it would freeze pension benefits beginning in 2008 and offer only a 401(k) retirement plan in the future.
In many ways, the results sum up all that is good and not so good about IBM in the eyes of investors. Profit grew 13 percent as savings from employee restructuring and a focus on higher-margin business kicked in. At the same time, sales continued to be sluggish, as IBM faced relentless competition from local and foreign competitors in its all-important services segment.
"IBM reaffirmed its traditional strengths and weaknesses with investors," said A.M. Sacconaghi, an information technology analyst for Sanford C Bernstein & Co. He noted that the company's strength was in its earnings growth, while sales growth remained elusive.
* Overall revenue fell 12 percent in the quarter, to US$24.4 billion.
* Profit expanded 13 percent to US$3.2 billion.
* Earnings per share were US$2.01, beating Wall Street's forecast of US$1.94.
* Revenue growth continued to rely on the servicing business, which accounted for one-half of the firm's sales.
* However, the unpredictability of some of its long-term servicing contracts raised some concerns.
For the quarter, overall revenue was down 12 percent, to US$24.4 billion. Revenue growth continued to hinge on its large servicing business, which accounts for one-half of its total sales. While margins improved, sales remained sluggish, down 4.9 percent for the quarter though it was up 2 percent for the year. IBM faces competition from domestic services providers like Hewlett-Packard and Accenture, as well as companies based in India like Wipro and Infosys.
One question mark for the servicing business is the unpredictability of some of the longer-term contracts for IBM's outsourcing business, which is a large component of its service business.
Wall Street analysts forecast earnings per share of US$1.94 for the fourth quarter, a figure that IBM comfortably exceeded at US$2.01 a share. Total fourth-quarter earnings were US$3.2 billion, up 13 percent. For the year, profit was up 6 percent, at US$7.9 billion.