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IBM Q4: Cost Cuts or Growth?

Big Blue pulled off a steady fourth quarter to close out 2005, but faced price pressures across some of its biggest revenue engines and rising pension costs that ate into its overall results during the period.

The results had analysts questioning IBM about how aggressively it would push back on its own pricing in order to answer competitors' price-slashing in some key markets, such as blade servers. Analysts also wanted to know what it would do to cope with an expected slow down in key outsourcing revenue in 2006.

Revenues were $24.4 billion for the quarter, down 12 percent (8 percent when you adjust for currency swaps), compared to the same quarter a year ago -- which did reflect revenues from the divested PC business. Take out the PC revenue, IBM said, and revenues actually went up by 1 percent (up 3 percent, adjusting for currency) compared with the fourth quarter of 2004.

Earnings per share came in at $2.11 and trumped estimates by 17 cents.

Samuel J. Palmisano, IBM's chairman and chief executive officer called it another strong quarter in prepared comments, pointing to solid performances in systems, middleware and business transformation services -- which alone grew by 25 percent for the year.

But key drivers were off, or flat. Global Services revenue, which accounts for about half of IBM's revenues, were down by 5 percent (1 percent when factoring in currency rates), at $12 billion in the quarter. However, bookings of $11.5 billion were better than expected.

Hardware revenues fell by 27 percent (25 percent, adjusting for currency) to $6.9 billion in the fourth-quarter 2005 compared to $9.5 billion in the year-ago period. This figure also includes revenue from its divested PC business. Take out the PC business revenues and hardware revenues actually grew by 6 percent (or 9 percent of you adjust for currency), IBM added.

Servers made the difference for IBM's systems and technology group, which were up by 6 percent from last year to $6.8 billion.

Hardware revenues for the Systems and Technology Group totaled $6.8 billion for the quarter, up 6 percent. Revenues from the zSeries mainframe product increased 5 percent compared with the year-ago period, IBM said.

Although revenues from IBM's pSeries UNIX servers went up by 4 percent year-over-year, revenues from its iSeries midrange servers decreased 18 percent. Sales of xSeries servers were flat.

Storage filled the gaps, coming in at 24 percent higher, along with Microelectronics, which jumped by 48 percent.

Software was flat. Revenues were $4.6 billion, about the same as a year ago for the same quater. (If you do the currency adjustment, they were up 3 percent).

The cost of retirement plans added up to about $522 million in charges this quarter, IBM said.

And Global Services saw a 32 percent slide in strategic signings, impacted in part by cost pressures, and a slowdown in big contracts overall.

Mark Loughridge, CFO of IBM, said during a conference call that the Global Services division was addressing the slowdown by adding business development skills and by adding more heft to its business consulting services division, which was up by 144 percent from the same time a year ago.

"We're taking actions to improve our growth in consulting systems and administration -- such as adding staff on SOA and Web services solutions," he said during a conference call Tuesday.

But clearly, pricing pressures from competitors in services, as well as in hardware, especially blade servers, took some toll too. Analysts wanted to know how aggressively IBM would answer the price-pressure.