IBM continues its profit growth

The New York TimesJanuary 22, 2013 

For years, IBM has delivered on a formula – strong earnings gains with scant revenue growth.

The big technology company repeated the pattern on Tuesday with solid quarterly profits on flat revenue. Its earnings performance exceeded Wall Street’s estimates, and even revenue was a bit ahead of analysts’ forecasts.

IBM, which has thousands of employees at its Research Triangle Park campus, is the largest supplier of information technology – hardware, software and services – to corporations and government agencies worldwide. So its results are closely watched for signs of broader trends in business technology spending.

The company’s net income rose 6 percent to $5.8 billion. IBM’s operating earnings per share rose 14 percent to $5.39 a share, well ahead of the average estimate of analysts of $5.25 a share, as compiled by Thomson Reuters.

Revenue for the quarter was $29.3 billion, compared with a Wall Street forecast of $29.1 billion. In the last quarter of 2011, IBM reported revenue of $29.5 billion. But the 2011 fourth quarter included $239 million in revenue from IBM’s computerized cash register business, which was sold to Toshiba TEC last year.

In a statement, Virginia Rometty, IBM’s chief executive, pointed to the company’s record profit, earnings per share and cash flow in 2012, and she vowed to keep investing in new businesses and fast-growing geographic markets.

But there were weak spots in the quarter. Revenue at the company’s big technology services business slipped in the quarter, though profits were up strongly in the services unit. The loss of the cash register revenue was partly offset by higher sales of a new line of mainframe computers, the zEnterprise EC12, which began shipping in September.

In after-hours trading, IBM shares rose $8.72 a share, or 4.5 percent. In the regular session, the shares rose $1.61 a share, to $196.08.

But more than most technology suppliers, IBM has moved aggressively into faster-growing markets abroad and into higher-margin products and services. These more profitable businesses typically combine hardware, software and industry expertise to, for example, help companies analyze vast amounts of data to find opportunities to cut costs and increase sales. And such tailored offerings are sold to governments to manage traffic, reduce energy consumption and curb crime.

“These are complete solutions where IBM has a competitive advantage,” said Josh Olson, an analyst at Edward Jones. “That makes the company more resilient and less susceptible to sluggishness in the broad corporate technology market.”

But for years, IBM has been as much known for financial discipline as for its strategic acumen. For the last 15 years, IBM has averaged 2 percent revenue growth per year, while earnings per share have increased 11.5 percent annually, estimates A.M. Sacconaghi, an analyst at Sanford C. Bernstein.

The robust earnings performance, Sacconaghi said, has been accomplished largely through relentless cost-cutting and share buybacks – probably $15 billion or so this year, he estimates.

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