IBM cruises in record Q4

IBM Corp. exceeded analysts' estimates in its fourth quarter Thursday, returning a profit of $2.
Written by Larry Barrett, Contributor

IBM Corp. exceeded analysts' estimates in its fourth quarter Thursday, returning a profit of $2.3bn (£1.40bn), or $2.47 a share, on record sales of $25.1bn. IBM shares closed up 2 9/16 to a 52-week high of 197 1/16 ahead of the earnings report.

First Call consensus expected Big Blue to earn $2.45 a share in the quarter. The $25.1bn in sales represents a 6 percent jump versus the year-ago period when it raked in $2.09bn, or $2.11 a share, on sales of $23.7bn. For the year, IBM earned $6.3bn, or $6.57 a share, on record sales of $81.7bn, up from $6.1bn, or $6.01 a share, on sales of $78.5bn in 1997.

It's business as usual," said Bob Gutenstein, an analyst at Kalb, Voorhis. "For as big as it is, IBM has quickly and efficiently moved to capitalise on the emerging online economy." In the past three months, IBM shares have improved more than 67 percent, surging from $119 a share in October to near $200 a share this week. "We had a good quarter that capped a year of significant progress for us," said chief executive Lou Gerstner in a prepared release. "We showed particular strength in services and software, two areas of critical importance as our customers increasingly embrace e-business and network computing."

Despite the solid earnings, Gerstner complained that weakness in Asia and Latin America, ongoing softness in memory chip prices, and pricing pressures in the server industry hurt the company's bottom line. But even with global concerns and the Year 2000 problems ahead in 1999, CFO Douglas Maine said on a conference call that Big Blue was feeling good about itself and should meet expectations. "We are feeling pretty good about the company right now," said Maine. "There's a high customer satisfaction and a number of new products this year. We also have a lot of products coming." IBM's increased focus on services is paying huge dividends.

IBM said about 60 percent of its profits now come from global services and software. Geographically, North American sales represented $11.3bn of the quarter's total revenue followed by Europe/Middle East/Africa at $8.7bn and the Asia-Pacific region at $4.2bn. In the quarter, total hardware sales slipped 2 percent from the year-ago quarter to $11.3bn. Services revenue jumped to $7.1bn, a 20 percent gain over the year-ago quarter and software sales improved 9 percent to $4.1bn.

Most impressive, IBM's software business checked in with a gross profit margin of 75.2 percent, up more than 3 percent from last year. Its total gross profit margin, however, declined from 40.1 percent to 39 percent in the quarter. It also spent approximately $1.6bn on share repurchases in the fourth quarter. The average number of shares outstanding in the quarter was 919.8 million compared with 964.8 million during the same period of 1997.

Last quarter, IBM made $1.49bn, or $1.56 a share, on sales of $20bn. Its shares were trading at a 52-week low of 92 5/8 in March.

Nineteen of the 23 institutional investment firms following the stock rate it either a "buy" or "strong buy.

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