IBM's alternate universe: Big Blue sees great 2008
Thus far 2008--all two weeks of it--hasn't been a pretty for the tech industry. Worries about the economy prevail. And even companies that had relatively good things to say like Intel get clobbered. It's ugly out there--unless you're IBM.
IBM's earnings results for the fourth quarter Thursday were as good as advertised. They were so good that IBM announced them a few days early. IBM confirmed fourth quarter earnings from continuing operations of $2.80 a share on revenue of $28.9 billion.
IBM's sales were strong in Asia, Europe and emerging markets--65 percent of Big Blue's revenue comes from international markets. Overall, IBM's various divisions turned in strong results. To be sure, IBM is benefiting from a weak dollar, but the outlook for 2008 is decidedly (shockingly) upbeat. Steve Lohr at the New York Times says IBM a separate reality. It's more like IBM operates in a parallel universe where the economy is great.
On a conference call with analysts IBM CFO Mark Loughridge said the following:
Our Services business enters the year with $118 billion of backlog, and a complement of offerings and capabilities that deliver both high value and productivity to clients. Software continues to capitalize on industry imperatives such as SOA and Information on Demand. And in our Systems business, our Unix and storage performance is strong, with a number of key product introductions in 2008, including our new mainframe in late February, and the introduction of POWER6 to the rest of Systems p and i product lines in the first and second quarters.
Second, we have a significant base of business in fast growing economies. We talked about that earlier in the presentation and I gave you a map so you could conceptualize this, but in the fourth quarter, 65 percent of our revenue was outside of the U.S. Countries growing more than 10 percent in local currency in the fourth quarter made up 22 percent of our revenue base, and these countries collectively grew more than 20 percent. So we’ve been investing for years to drive this performance, and we’ll continue to invest to capture this growth.
Third, our operating model is in place and executing well.
Our annuity businesses, which drive about half of our revenue, provide a solid base of profit and cash. We have expanded margins for four consecutive years, and have the ability to continue to generate higher returns. And we have a disciplined approach to aligning investments to growth, so just as we are aggressively investing in high growth markets, we’re also taking a more measured approach in the more stable markets.
Fourth, we’re continuing to invest in our acquisition strategy and have been successful in bringing technologies and businesses into IBM that we leverage across our enterprise.
Finally, we generate a lot of cash, and we’ve got a very solid balance sheet with debt-to-cap now at 30 percent, and $16.1 billion of cash on hand at the end of the year. We have substantial flexibility to make investments where we see the best opportunities.
So we feel good about how our business is positioned as we enter 2008. With the strength in our global businesses, a broad portfolio of offerings, a solid operating model and strong financial position we believe that we can deliver earnings per share growth of 15 to 16 percent in 2008. This would result in an EPS range of $8.20 to $8.30. And with this strong performance, we are on track to our 2010 roadmap of $10.00 to $11.00 of earnings per share.
Indeed, IBM should feel good. Its 2008 outlook is well above expectations. Frame IBM's outlook--it may be the best one you'll hear all quarter.