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IBM FINANCIAL

Analysis of IBM’s Fourth Quarter Business Results

A Crescendo Finale!

As in Beethoven’s Ninth, Big Blue’s 2004 “Ode de Joy” Ends on High Notes

WESTERN AUSTRALIA, Jan 19 – As in Ludwig van Beethoven’s celebrated ninth symphony’s fourth movement, “Ode de Joy,” IBM’s fourth quarter was a jubilant crescendo finale to a strong year.  By the time the last chords of Big Blue’s version of the “Pastoral” died down in the waning minutes of 2004, members of the “symphony in blue” could be imagined slumping in their seats: exhausted but triumphant; spent but fulfilled… like victorious runners who collapse after the finish line.

It was “a powerful fourth quarter,’ the Big Blue band leader and conductor, Sam Palmisano, said of Armonk’s version of “Ode de Joy.”  “It was IBM’s strongest fourth quarter ever, with earnings exceeding $3 billion for the first time.”

Revenue growth was equally impressive – up 7% from a very strong fourth quarter 2003, and up 18% sequentially from the third quarter, IBM’s best third quarter in years (see Slow Quarter No Longer, Oct 2004).

[snip]

Business Segments Analysis

IBM Global Services.  Moving on from (trading) fluff to (business) substance, IBM Global Services (IGS), now the largest business segment accounting for 49% of total revenues, came through for IBM in the fourth quarter with a 10% surge (6% in constant currency). 

Particularly encouraging was the fact that the consulting segment joined the outsourcing unit’s double-digit growth rates (up 12% each).  As a result, the gross margin improved from 24.8% to 25.1%.  Integration services grew by 6%, while maintenance revenues increased 3%.

On the down side, however, new contract signings were down 27% for the quarter ($12.7 billion vs. $17.3 billion).  They were also down 22% for the year ($43 billion vs. $55 billion).

[snip]

IBM’s biggest unit is selling less and losing more from its backlog every year.  It seems an accounting miracle that such an operation could be having a double-digit revenue growth.  But that’s what IGS has been reporting.  It remains to be seen how long it can keep it up.

[snip]

Hardware.  The IBM 2004 server renaissance unfolded first at the top end...

Since then, the zSeries revenue has gone on to grow by 44% in the second quarter, and by 12% in the third, before declining by 4% in the fourth – relative to a very strong last period of 2003.  And even in the latest and biggest quarter, the mainframe capacity, measured in MIPS, increased by 6% over the corresponding period a year ago.

[snip]

But the real hero of the fourth quarter was the Intel-based xSeries.  The xSeries revenues surged by 25%, pushing the 2004 total up by 24% over last year’s.  The Unix-based pSeries also had a strong quarter, with revenues rising 15%.  For the full year, the pSeries revenues were up 7%.

[snip]

As we noted in our recent “IBM Server Renaissance” report, the iSeries is due for a marketing facelift this year.  And its new leader, Mark Shearer, who took over as general manager earlier this month, is the man facing the greatest challenge among IBM servers – restoring an IBM erstwhile “crown jewel” and its second-oldest product line to its former glory. 

[snip]

Software.  The IBM software unit continues to excel, especially in terms of profitability.  Although only about a third of the largest IBM unit’s revenues (IGS), IBM software delivered 21% more pretax profit to the company’s bottom line ($1.7 billion vs. $1.4 billion).  That’s because at 89%, its gross margin is among the industry’s highest, as is its 34% pretax margin.

[snip]

Geographies.  ...The best performer of the fourth quarter, however, was the Americas region.  It recorded the same increases as for the full year (5% and 4% respectively).  Asia/Pacific was second, with a 6% and 3% growth, while Europe again ended up in the cellar, with 9% and 1% revenue increases.

The fact that the iSeries and Europe seem like IBM’s current “problem children” is probably not coincidental.  Europe has traditionally been the iSeries’ strongest market.  So “as goes Europe, so goes the iSeries…” may be the situation here.  Fix one, and you fix the other?

[snip]

Industries.  All five major IBM industry segments reported solid growth in 2004, as did the SMB (small and medium business).

[snip]

The SMB market, which IBM started to pursue aggressively two years ago (see “Finally Heard!”, Jan 2003), grew at the overall Big Blue growth rate for the fourth quarter.  It was up 7%.  For the full year, however, the SMB grew at a lower rate than IBM as a whole (8% vs. 9%), giving rise to questions if Big Blue’s SMB campaign may be running out of steam.  After all was said and done in the last two years, its share of corporate revenues is still only 23%, the same as it was when the SMB hullabaloo started.

[snip]

Outlook

IBM’s fourth quarter results were a crescendo finale to a strong year.  But now IBM has to do it all over again in the New Year. 

IBM CFO Mark Loughridge described 2004 in the post-earnings release conference as a year in which the economic environment improved, shifting from recovery to moderate expansion.

[snip]

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Volume XXI, Annex Bulletin 2005-01
January 19, 2005

Bob Djurdjevic, Editor
(c) Copyright 2005 by Annex Research, Inc. All rights reserved.
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