Business | Technology

IBM continues its profit growth

Company reported solid profit on flat revenue in the last quarter of 2012

  • NYT
  • Published: 12:58 January 23, 2013
  • Gulf News

For years, IBM has delivered on a formula: strong earnings gains with scant revenue growth.

The company continued the pattern on Tuesday, reporting solid profit on flat revenue in the last quarter of 2012. Its earnings performance exceeded Wall Street’s estimates, and even its revenue was a bit ahead of analysts’ forecasts.

IBM is the largest supplier of information technology - hardware, software and services - to corporations and government agencies worldwide, and its results are closely watched for signs of broader trends in business technology spending.

Some analysts and investors had worried that slower growth in China, Europe’s continuing troubles and anxiety about the fiscal impasse in the United States might have chilled corporate investment in technology in the fourth quarter.

But in IBM’s report, and in a conference call with analysts, there was no suggestion of a drop at the end of the year. “For the most part, IBM’s performance was pretty good,” said A.M. Sacconaghi, an analyst at Sanford C. Bernstein. “Relative to the worry that was out there, investors feel good about it.”

In after-hours trading, the company’s stock rose as much as $8.72 a share, or 4.5 per cent. It closed the regular session at $196.08, up $1.61 a share, or 0.83 per cent.

IBM’s net income rose 6 per cent, to $5.8 billion, in the fourth quarter. Its operating earnings per share rose 14 per cent, to $5.39, well ahead of analysts’ average estimate of $5.25 a share, as compiled by Thomson Reuters.

Revenue was $29.3 billion, compared with a Wall Street forecast of $29.1 billion. A year earlier, IBM reported revenue of $29.5 billion, but that quarter included $239 million in revenue from the company’s computerized cash register business, which it sold to Toshiba TEC in 2012.

In a conference call, Mark Loughridge, IBM’s chief financial officer, called the quarter “very, very strong” and said it finished a year of record profit, earnings per share and cash flow.

There were weak spots in the quarter. Revenue in the company’s big technology services business slipped 2 per cent to $15 billion, but profit rose in the services divisions nonetheless.

More than most technology suppliers, IBM has moved aggressively into fast-growing markets abroad and into higher-margin products and services. These more profitable businesses typically combine hardware, software and industry expertise to, for example, help companies analyze vast amounts of data to find opportunities to cut costs and increase sales.

Such tailored offerings are also sold to governments to manage traffic, reduce energy consumption and curb crime. They are products and services that IBM has singled out for investment and growth, like its data analytics unit, which grew 13 per cent in the quarter, and its so-called Smarter Planet group, which grew more than 25 per cent.

“These are complete solutions where IBM has a competitive advantage,” said Josh Olson, an analyst at Edward Jones.

More than half of the revenue in those high-growth businesses comes from software, where profit margins are highest, Loughridge said.

Today, IBM is known as much for its financial discipline as for its strategic acumen. For the last 15 years, it has averaged 2 per cent revenue growth a year, while earnings per share have increased an estimated 11.5 per cent annually, according to Sanford C. Bernstein.

The company’s robust earnings performance, Sacconaghi said, has been accomplished largely through relentless cost-cutting and share buybacks.

IBM spent $12 billion last year to buy back its own shares. But Loughridge sought to deflect any notion that the buybacks came at the expense of investments in innovation and long-term growth, noting that since 2010, the company has spent $19 billion on research and development. “We’re plowing investments hand over fist into the business,” he said.

The company’s hardware revenue slipped 1 percent, to $5.8 billion. The division’s sales were hurt by the loss of the cash register business. But mainframe sales surged 56 percent thanks to a new line of mainframe computers, the zEnterprise EC12, which began shipping in September.

The software business grew 3.5 per cent, to $7.9 billion, helping to bolster corporate profit margins. In the last three years, Loughridge said, IBM has spent $11.5 billion on acquisitions, mostly on specialized software companies.

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