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IBM's Q4 earnings surprise analysts

A slowing US economy is not hurting IBM yet.

But the strength of the technology giant's quarterly profit -- up 24 percent -- may not be as reliable an indicator of broader trends in the US economy as in the past. IBM's business lies increasingly outside the US, and the company no longer sells products like personal computers to consumers.

The news on Monday morning that earnings were far higher than analysts predicted pushed shares of IBM sharply higher, rising US$5.26, or 5.4 percent, to US$102.93. The IBM announcement also lifted the broader market on the belief that corporate spending on technology is holding up far better than people had thought.

The strong fourth-quarter performance by IBM, analysts say, is mainly a sign that some leading global corporations may be able to sidestep the impact of a sputtering US economy because they depend on the US market far less today than in the past.

The largest US corporations get more than half of their revenues from overseas markets. That is true of many large technology companies like Intel and Hewlett-Packard. IBM, a longtime multinational, is a leader in the current globalization trend to tap overseas markets and talent.

Today, two-thirds of IBM's sales and its workers are outside the US.

"IBM has the most aggressive internationalization strategy of any of the major information technology companies," said Frank Gens, chief analyst of IDC, a research firm.

But he also noted: "IBM isn't a bellwether of the US economy."

In the US, technology spending will increase this year by only 3 percent or 4 percent, a slowdown from a 6.5 percent rise last year, IDC estimates. Corporate investment in computer hardware, software and services is expected to taper off in response to a weaker economy. And the financial sector, a big spender on technology, will likely be soft because of losses from the housing credit squeeze.

In a statement, IBM's chief executive, Samuel Palmisano, said the company's results were driven by "the broad scope of IBM's global business -- led by strong operational performance in Asia, Europe and emerging countries."

There was no mention of the US market.

In recent years, IBM has greatly expanded its business and employment in fast-growing markets like India, China, Brazil and Russia. The company, for example, has 75,000 workers in India and 13,000 in China.

Last month, IBM announced it would invest an additional US$1.6 billion this year to pursue opportunities in the next tier of emerging markets, including Ukraine, Vietnam, Ecuador, Venezuela, Poland and the Czech Republic.

The globalization trend, some say, may be moderating the spending cutbacks at large US companies. In the recession six years ago, corporations typically made deep cuts in their technology budgets across their companies' operations.

Gary Beach, publisher emeritus of CIO Magazine, said based on surveys done by his magazine and conversations he has had with corporate managers, things will be different in this downswing.

"The cuts will be much more selective this time. Companies are not going to cut back on the technology investments they need to remain competitive because now they compete globally," Beach said.

IBM released its financial results three days ahead of schedule. Over the last few days, IBM executives recognized that the fourth-quarter results coming in from its worldwide operations would be well above Wall Street's consensus estimates.

"Given the economic climate, where there has been a lot of speculation about market conditions and the performance of technology companies, we wanted to get this information to investors quickly," an IBM spokesman, Edward Barbini, said.

The conference call with analysts, when IBM executives will explain the company's performance in detail, will wait until tomorrow afternoon.

In its preliminary announcement, IBM said its quarterly profit had increased 24 percent, to US$2.80 a share, while revenue rose 10 percent, to US$28.9 billion. The company's profit was US$0.20 a share above the consensus of analysts, as compiled by Thomson Financial. IBM's revenue was more than US$1 billion higher than the consensus.

Currency gains lifted IBM's results, accounting for more than half of its rise in revenue. Yet with so much of IBM's business abroad, analysts try to model the currency impact into their financial forecasts.

Despite few details, industry analysts said IBM apparently gained as well from software and services deals that had been delayed in the third quarter but closed in the fourth quarter. They noted the performance also underlined the solid execution of IBM globalization strategy.

"It's very surprising," said A.M. Sacconaghi, an analyst at Sanford C. Bernstein. "And the open question is whether the environment for technology was better than most people thought."
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