IBM Sees Strong '09 Profit, but Recent Sales Down

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SAN FRANCISCO - IBM Corp. forecast significantly higher profits for 2009 than Wall Street expected, a surprisingly bullish sign that reflects IBM's belief it can outmaneuver the financial crisis by focusing on landing high-margin services and software contracts. Shares leaped 4 percent in extended trading.

The Armonk, N.Y.-based company predicted at least $9.20 per share in profit in 2009. Analysts surveyed by Thomson Reuters were expecting $8.75 per share.

The gap reveals that analysts had been expecting IBM to be hurt worse by its heavy dose of sales to big banks and other customers devastated by the economic downturn. Instead, IBM's results show that while the company has seen some sales vaporize, it is still able to wring out better profits because of aggressive cost-cutting and by focusing only on the most profitable deals.

IBM said Tuesday its net income in the fourth quarter of 2008 was $4.4 billion, or $3.28 per share. That amounted to a 12 percent profit increase from $3.95 billion, or $2.80 per share, in the same period a year earlier.

Analysts were expecting IBM to earn $3.03 per share this time.

One key measure of profitability — IBM's gross profit margin — expanded to 47.9 percent of revenue, three percentage points better than the year-ago period. IBM credits its services business with leading the gain.

"To be honest, I didn't believe they could show something like this — I think the results they posted were stellar," said Peter Misek, an analyst with Canaccord Adams. "They just executed really well — really, really, really well."

The higher profits came even as IBM's revenue fell 6 percent to $27 billion, short of the $28.1 billion analysts were expecting. IBM said revenue would have decreased only 1 percent were it not for currency fluctuations, but sales were down in all major geographic areas.

Revenue in services, IBM's largest business segment, dropped 4 percent, but IBM was able to ink $17.2 billion in new services contracts. That was a healthy showing that demonstrates companies are still forking out for outsourcing and other technical support contracts, which are often viewed as money-savers in the long run.

Hardware revenue fell 18 percent. Mainframe revenue fell 6 percent, and sales of lower-end servers based on industry-standard processors fell 32 percent.

Weakness in hardware sales was expected, since companies don't buy as much new machinery when times get tough. But even struggling businesses generally keep ponying up for the services contracts they have locked into, since many of those arrangements are for vital parts of the business, like managing their billing or maintaining the databases.

Rick Hanna, an equity analyst with Morningstar Inc., said he is concerned about the slowdown in some of IBM's hardware sales, since having IBM machines inside a business helps sell software and other services. Still, Hanna said he was "very, very impressed" with IBM's ability to improve profit margins despite the grisly economic landscape.

"When I was reading through it my first comment was 'wow,'" he said. "It really speaks to them developing their high-value-added strategy and executing it. ... You've got to recognize that this isn't your father's IBM. It's not the one that's so hardware-dependent. Software and services tend to be more resilient, and they're proving that."

IBM did not announce widespread job cuts, which some analysts believed were imminent, but repeated that it is still doing targeted layoffs as part of ongoing cost-cutting. IBM lays off thousands of workers each year, but overall head count keeps rising as the company adds jobs in faster-growing regions or more profitable divisions.

IBM employed more than 400,000 people at the end of 2008, the first time in more than 20 years the company's work force has swelled that big. The last time IBM employed a work force that size, a severe downturn caused the company to jettison many of those workers in waves of brutal downsizing.

IBM shed more than 150,000 workers in the 1990s as the company racked up nearly $16 billion in losses over a five-year stretch.

For all of 2008, IBM earned $12.3 billion, or $8.93 per share. That represents an 18 percent jump from a year ago. Sales were $103.6 billion, a 5 percent increase.

The earnings report came out after IBM shares closed at $81.98, down $2.94, or 3.5 percent. The stock jumped to $85.30 in after-hours trading.