IBM shows higher 2005 profit but flat sales

IBM ended 2005 with strong earnings, but essentially flat sales, as it reported on Tuesday net income for the year of $8 billion on revenue of $91.1 billion.

IBM exited the PC manufacturing business in early 2005 by selling its operations to China's Lenovo Group. The change reverberated through IBM's financial results throughout the year, as it reported declining revenue compared to periods in the prior year, which included the PC business. Excluding PC revenue, IBM's 2005 revenue rose 3%.

Big Blue's revenue in the fourth quarter, ended Dec. 31, was $24.4 billion, around $1 billion shy of the consensus estimate of analysts polled by Thomson First Call. That total represents a 1% decline from 2004's fourth-quarter revenue, excluding PC revenue.

IBM's income for the quarter was $3.2 billion, up 13% from 2004's fourth-quarter income. Per-share earnings were $2.01, including a 10 cents per share hit from a one-time charge related to IBM's pension plan changes. Thomson First Call had a consensus per-share earnings estimate of $1.94.

The company is compensating for a tough spending environment by tightening its operations, casting off underperforming businesses like its PC unit and targeting high-margin opportunities. "Early in the year, we said that we would deliver our profit more through cost and expense performance than revenue," IBM CFO Mark Loughridge told analysts on a conference call following IBM's results release.

Pricing pressures are intense in the storage and server markets, with IBM's xSeries server line reporting double-digit growth in shipment volume but flat revenue for the quarter. IBM's WebSphere line of middleware software was a strong performer with 10% growth for the quarter, a gain Loughridge attributed to high customer interest in services-oriented architecture deployments.

Geographically, IBM had solid results in the Americas but saw sales slip in Asia-Pacific (excluding the effects of its discontinued PC business), where it has implemented restructuring actions that Loughridge forecast would begin showing returns in the first quarter. Four emerging markets IBM has singled out for special attention all showed year-over-year gains: India led the list with 55% growth, while China grew 8%, Brazil 7% and Russia 29%.

IBM's vaunted Global Services business posted a 5% sales decline in the fourth quarter and eked out 3% growth for the year, reporting total revenue of $47.4 billion, but increased its profitability by boosting its gross margins.

Gross profit margin improvement in the quarter of more than five points shows the benefits of the company's focus on more profitable, "high-value segments" of IT, coupled with emphasis on productivity and integration, IBM CEO Sam Palmisano said in a prepared statement. The company's business model is "much more balanced and profitable than it was just a few years ago," he said in the statement.


Copyright © 2006 IDG Communications, Inc.

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