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Thu, Jan 22, 2009 - Page 10 News List

IBM bucks trend, posts strong profits

OUTSTANDING While most high-tech companies saw earnings drop, IBM’s net profits remained strong, aided by its focus on higher-profit software and services

NY TIMES NEWS SERVICE , NEW YORK

IBM reported a solid 12 percent gain in net income for the fourth quarter, bucking the trend of steep declines for many technology companies amid the economic downturn and surprising Wall Street.

The company is seen as a bellwether of global technology spending among corporations. Yet its strong performance in the fourth quarter, analysts say, mainly points to the success of its strategy in recent years of tilting toward higher-profit software and services and reducing its reliance on the computer hardware business, which suffers more in down economic cycles.

IBM’s hardware sales did drop 20 percent in the quarter, but that weakness was more than made up by strong results from the company’s far-larger services and software groups.

IBM chief executive Samuel Palmisano said in a statement that “a strong fourth quarter capped an outstanding year.” Despite the global economic turmoil, he also expressed confidence that the company could reach its earnings goal of at least US$9.20 a share for this year — well above Wall Street’s recent expectations.

Some analysts had predicted that IBM would announce as many as 10,000 staff cuts, or 3 percent of the work force, to trim costs in a weak economy.

But trimming, Palmisano wrote in an e-mail message to employees on Tuesday, is not the company’s current strategy.

“Many companies today are curtailing or drastically cutting spending and investment, even in areas that are important to their future,” Palmisano wrote.

“We are taking a different approach, not only because we have the financial strength to do so, but because we choose to manage IBM for long-term success,” he said.

In after-hours trading after the quarterly results were announced, IBM shares rose 4.14 percent, to US$85.37. Shares closed on Tuesday at US$81.98.

IBM’s solid profit performance came largely from higher profit margins in the services and software businesses that now account for more than 80 percent of the company’s earnings.

In a difficult economic environment, IBM has apparently been successful in convincing corporations and government agencies that its technology would deliver gains in efficiency.

“Cost-saving offerings continue to sell,” IBM chief financial officer Mark Loughridge told a conference call with analysts.

IBM reported net income of US$4.4 billion, a 12 percent gain from a year earlier. Its quarterly earnings were US$3.28 a share, well above Wall Street’s consensus of US$3.03 a share.

The company’s profits benefited by US$0.16 a share from foreign tax credits and the new research tax credit in the US.

In the year-ago quarter, IBM reported profits of US$4 billion, or US$2.80 a share.

The company reported quarterly revenue of US$27 billion, down 6 percent, reflecting the weakness in hardware sales and a stronger dollar. In constant dollars, excluding the impact of currency swings, revenue slipped 1 percent.

“Growth is decelerating for IBM, but it has unique advantages that have helped it hold up pretty well over all,” said AM Sacconaghi, an analyst at Sanford C. Bernstein.

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