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FINANCIAL

Analysis of IBM’s Fourth Quarter Business Results

IBM Ends Year with a Bang

Hardware Boost, Especially in Europe, Asia, Lifts Revenues and Profits

PHOENIX, Jan. 19 - After a slow start in the first half of 2000, IBM ended the year with a fourth quarter bang.  Boosted by a resurgence of hardware sales (up 10%), and strong performances in Europe and Asia/Pacific, the Big Blue earnings shot up 28% on revenue growth of 6%. 

The results would have been even better had the foreign currency translations not taken about a 6% slice out of IBM’s growth rate.  The 10% hardware growth, for example, would have been 15%.  The overall 6% increase would have been 12%.

On the other hand, one must keep in mind that the fourth quarter of 1999 was the pits for IBM, and thus an easy target for comparisons a year later (see “A Slam-Dunk of Bunk,” Annex Bulletin 2000-04, Jan. 20, 2000). 

How easy?  Well, take the hardware revenues, the biggest factor in IBM’s strong 4Q00 results.  One year ago, they were $10.45 billion, more than a billion dollars lower than the 2000 fourth quarter total ($11.46 billion).  But two years ago, they were also $11.46 billion. 

IBM’s total 4Q revenues followed the same pattern. Back in 1998 they were $25.1 billion.  Two years later, they were only $25.6 billion.  Again, virtually flat.

IBM’s 4Q00 resurgence, therefore, was nothing more than getting back to the starting line from two years ago.  In other words, there has been no growth for two years.  Yet Wall Street loved the news and pushed the Big Blue stock to $108, up 12% for the day after the fourth quarter results were released. 

So much for security analysts and investors trying to look beyond the information Armonk spoon-feeds them.

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Segment Analysis

SERVICES. IBM Global Services (IGS), the company’s best growth segment in the 1990s, showed only a modest 7% revenue increase in the fourth period (to $7.7 billion, excluding maintenance).  In constant currencies, however, IGS would have reported a 12% jump.

That IBM managed only a single-digit rise, despite an easy comparison to the weak 4Q99 IGS results (IGS revenues were up only 2% in 4Q99; the slowdown was mostly due to the Y2K bug, we were told by IBM at the time), was one of the surprises in the fourth quarter release.  Especially after another big ($12.5 billion) quarter in new contract sales.  Which left the Big Blue with a backlog of about $85 billion, up from $60 billion at the start of the year.

The fact that IGS only managed a 7% revenue growth notwithstanding such stellar new sales results, suggests that IBM’s services arm may be also experiencing some pretty significant terminations of older contracts.

Within this IBM business segment, Integrated Technology Services had the best growth rate - up 21% in constant currencies, “driven by CISCO and other OEM alliances,” IBM said.  Business Innovation Services recorded a 12% increase, while the biggest and the most important Strategic Outsourcing activities checked in with an 11% rise in 2000.

IBM’s CFO, John Joyce, also said that the e-commerce generated a 70% year-over-year surge.

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SERVERS. New zSeries servers racked up about $500 million in fourth period sales, pushing the year-over-year MIPS growth up 100%.

IBM’s overall server revenue was up 35% (in constant currencies), with pSeries (UNIX) servers leading the way with a 49% surge, followed by 29% for xSeries, and 15% for IBM’s proprietary iSeries.

SOFTWARE. Software revenues were down 1% in the quarter to $3.6 billion, mostly due to the declines in operating systems business.  In constant currencies, however, the software revenues were up 6%.  

WebSphere, MQ Series and DB2 experienced the fastest growth since a year ago - 190%, 70% and 50% respectively.

PC. IBM’s PC business, the company’s Achilles’ heel for years, chalked up a modest (8.6%) increase in the fourth period (up 15% in constant currencies).  And for the first time for some time, the PCs didn’t lose money for IBM.  Pickings were meager, though - only $34 million in pretax profit on revenues of $4.7 billion. But they beat red ink.

Sales of mobile units were up 28%, while the shipments of desktops declined 4%.

GEOGRAPHIES. Overseas regions, especially Europe and Asia/Pacific, reported the best 4Q00 results.  Although European revenues increased only 3% as reported, in constant currencies, they would have been up 18% since the 4Q99.  Even more importantly, Europe’s profit was at an all-time high, said Joyce, the IBM CFO.

Text Box:  While Europe was a late bloomer in 2000, IBM’s Asia/Pacific units consistently outperformed their counterparts in other world regions through the year.  In the fourth quarter, the A/P area had a 13% growth (20% in constant currencies).  This followed the 17% and 13% respective increases for this part of the IBM world in the third and the second quarters.

IBM’s OEM business also experienced double digit growth, 13% as reported and 14% in constant currencies.

Which leaves the Americas as the weak link in IBM’s global market chain.  Although the biggest market with $10.8 billion fourth quarter revenues, this region, of which the U.S. is by far the largest part, only had a 3% revenue increase (4% in constant currencies).

No wonder the IBM chairman, Lou Gerstner, bemoaned the “uncertainty about the economic climate in the U.S.,” as he looked ahead to 2001 in his statement.  But he said that IBM counted on other world regions to counterbalance this weakness.  “We look forward to another good year for IBM,” he concluded.

Guess one cannot argue that, when a company breaks $8 billion in net earnings for the first time in its history, its performance is anything but shabby.  But even that figure is up only 5% relative to last year’s net profit.  And 1999, lest we forgot, was the year in which IBM was plagued by the Y2K woes, Armonk told us.

Well, memories, memories… How short they can be if they are not so sweet.  

Happy bargain hunting!

Bob Djurdjevic






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume XVII, No. 2001-03
January 19, 2001

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

P.O. Box 97100,      Phoenix, Arizona 85060-7100
TEL: (602) 824-8111        FAX:

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