Services, Software Drive Healthy IBM Q4 Revenue, Profit

A huge jump in software revenue and substantial growth in its services business helped IBM overcome a big drop in hardware revenue to report an overall revenue growth of 2 percent for its fourth fiscal 2011 quarter.

That modest fourth quarter growth was a drag on IBM's full year 2011 revenue, which grew 7 percent for the year. But when combined with a positive outlook for 2012, it impressed investors who drove the company's shares up nearly 3 percent in after-hours trading.

For its fourth quarter of 2011, which ended December 31, IBM on Thursday reported revenue of $29.5 billion, up 2 percent over the fourth quarter of 2010. Big Blue also reported income of $5.5 billion, up 4 percent over last year, and earnings per share of $4.62, up 11 percent.

For all of 2011, IBM's revenue rose 7 percent over 2010 to reach $106.9 billion. The company also reported full year income of $15.9 billion, up 7 percent, and earnings per share of $13.06, up 13 percent.

Mark Loughridge, IBM's senior vice president and CFO for finance and enterprise transformation, said his company's financial results from 2011 kept IBM on track to reach its earnings per share goal of $20 by 2015.

"We just delivered a great quarter to cap off what I thought was a great year," Loughridge said.

Boosting IBM's fourth quarter and full year 2011 results was a 9-percent increase in revenue and 12-percent increase in profit for its software business, plus a huge 17 percent jump in profit for its services business.

Despite the economic downturn, IBM did very well in the Americas, with a 1-percent rise in fourth quarter U.S. revenue topped by a 13-percent rise in revenue from Canada. Overall, IBM's Americas revenue grew 3 percent over the fourth quarter over last year, compared to a 1 percent rise in EMEA (Europe, Mideast, and Africa) and a 2-percent rise in Asia Pacific. The Asia Pacific results were held back by a 9-percent shortfall in revenue from Japan.

IBM's global technology services revenue for the fourth quarter hit $10.5 billion, while its global business services revenue hit $4.9 billion. Both figures were up 3 percent over last year. Gross margins for global technology services rose 2.1 points to reach 36.6 percent, while gross margins for global business services rose 1.3 points to 29.3 percent, IBM reported. IBM exited the quarter with a $141 billion backlog in services.

IBM's services business was strongly impacted by slowdowns in the Japan and the public sector markets. If those two were not included, total services revenue would have risen 8 percent over last year, Loughridge said.

IBM's fourth quarter software revenue rose 9 percent over last year to reach $7.6 billion, and gave the company a gross margin of just under 90 percent. The key drivers were growth in business intelligence and storage solutions, Loughridge said.

Software revenue was up 21 percent for its WebSphere family, 9 percent for information management software, 14 percent for Tivoli, and 4 percent for Rational. However, its Lotus revenue fell 2 percent during the same period. Storage software sales rose 30 percent over last year, he said.

A real bright spot for IBM was its distributed database business, which reaped the benefits of a 70 percent increase in revenue from IBM's Netezza data warehouse business, which it acquired in late 2010. About 40 percent of Netezza's customers were new to IBM during the quarter, Loughridge said.

Next: Hardware Business Down, But From A Very Strong 4Q 2010

IBM's systems and technology business reported revenue of $5.8 billion, down 8 percent from a year ago thanks to a 31-percent drop in System z mainframe sales, a 2-percent drop in System x server sales, and a 1-percent drop in storage sales. The bright spot in its hardware business came from its Power Systems server line, where revenue rose 6 percent over last year.

Loughridge said the 31-percent drop in mainframe revenue resulted from a tough comparison with the fourth quarter of 2010, when sales rose by 20 percent over the prior year, making that the strongest-ever year for mainframe sales.

In fact, of all IBM's major brands across the company, System Z was the only one to see a drop in market share, he said. "The only brand that lost share was mainframes," he said. "Who do you think we lost share to? We lost share to Power, or own brand."

The 6-percent rise in Power server sales came thanks to IBM's strongest quarter ever in terms of Unix competitive displacements since it began tracking displacements in 2006, Loughridge said. IBM recorded 350 competitive displacements for the quarter worth a total of about $350 million. About 60 percent of those displacements were competitive wins against HP, with nearly all the remainder coming from Oracle. he said.

This compared to over 250 competitive displacements reported by IBM worth a total of over $240 million in the Unix server market during its fiscal third quarter, with the displacements split evenly between HP and Oracle.

For all of 2011, IBM recorded about 1,000 displacements worth about $1 billion, Loughridge said.

The competitive wins come in the wake of a dispute caused by Oracle's decision last year to stop software development for HP's Itanium server line.

That dispute helped IBM in 2011 become the top server vendor.

IBM is also doing very well in some of its advanced technology initiatives, Loughridge said. The company's business analytics revenue grew 16 percent over last year, its Smarter Planet initiative for connecting smart devices grew 47 percent, and its cloud revenue grew by over 300 percent, he said.

"We've been shifting our business to higher value areas, and to growth markets," he said.

Looking forward, IBM expects full-year 2012 earnings of $14.16 per share, compared to $11.52 per share in 2010 and $13.06 per share this year.