IBM Charges Up Year-end

IBM’s revenues were up by 7 percent during the fourth quarter, but its profit tumbled overall by 56 percent in part from charges on acquisitions, layoffs, and asset write-offs amid a continued slump in technology spending.

Global services, IBM’s consulting and IT services division, continued leading the way among all of IBM’s divisions with a 17 percent rise in revenues during the quarter.

Software and hardware sales were down by 2 percent and 1 percent at constant currency rates respectively, but averaged out to flat sales, IBM said.

Within the divisions, however, IBM’s WebSphere middleware products and some of its newer, high-end servers, including its new xSeries, showed continued strength.

Counting charges including discontinued operations, IBM said net income for the fourth-quarter 2002 was $1 billion, (59 cents per diluted common share), compared with $2.3 billion in net income, or $1.33 per diluted share, in the fourth quarter of 2001, a drop of about 56 percent. The results met or exceeded Wall Street’s expectations.

Revenues from continuing operations for the fourth quarter were $23.7 billion, up 7 percent compared with the fourth quarter of 2001 revenues of $22.1 billion.

The company said the results were impacted by charges related to its acquisition and integration of PricewaterhouseCoopers Consulting, which it purchased in 2002 for $3.5 billion. Not counting its charges, IBM said its net income would have been $2.3 billion.

It also recorded charges for the cost related to the reduction in headcount by 15,000 during the year, asset reductions and the sale of its hard drive manufacturing business to Hitachi.

For the full year, revenues were down 2 percent to $81.2 billion compared to 2001 when it took in $83.1 billion during the year.

IBM’s yearly profit from continuing operations was $5.3 billion ($3.07 per diluted common share), about a 34 percent drop from 2001’s profit of $8.1 billion (or $4.59 per diluted share.)

During a conference call to discuss the quarterly and year-end results, John Joyce, IBM’s chief financial officer, said 2002 was a volatile year for the IT segment of the technology industry. “We have seen that stabilize somewhat in the fourth quarter,” he said.

The results, while meeting analysts’ expectations, reflected the sluggish year for IT spending in key sectors such as hardware and software, but also provided some clues to where corporate customers are making purchasing decisions.

Revenue in global services, which accounts for about half of IBM’s overall revenues, rose by 17 percent to $10.6 billion compared to the same time last year. During the quarter, IBM signed more than $18 billion worth of services contracts, double the amount it signed during the third quarter of 2002.

Joyce said the division’s results got a boost from its PwCC acquisition. Without the operating results from the PwCC purchase, global services sales were down by 1 percent.

Software revenues were $3.8 billion, down about 2 percent from the same, year-ago quarter. “The software market is difficult,” Joyce said during the earnings discussion. He noted that customers continue to make smaller, short term investments in software with a focus on quick paybacks. In addition to IBM’s acquisition of Rational Software, he said IBM struck four new strategic alliances with software companies, bringing the company’s total to 90.

Within the software division, however, IBM said sales of its WebSphere line of middleware products were up by 4 percent and that its DB2 database products were up by 11 percent.

Hardware revenues from continuing operations slipped by 1 percent to $8.1
billion for the quarter.

Sales of its high-end iSeries lines, which include self-healing capabilities geared for improving data center performance, were down by 13 percent during the quarter. But Joyce said he expected the line to improve on the heels of an upcoming product announcement related to the company’s on-demand strategy of selling computing capacity to customers as their needs rise and fall.

Sales of IBM’s new xSeries servers, based on the Intel Xeon Processor MP, rose by 13 percent during the quarter. And while IBM’s high-end pSeries servers were essentially flat, its new p650 line, a midrange version of its supercomputing p690 lines, was sold out for the quarter, Joyce said.

Other bright spots within IBM’s hardware division were with its zSeries servers. Overall sales within that line were down by 4 percent but sales for mainframe Linux operating systems, up by 45 percent from the same time last year, accounted for 17 percent of the line’s revenue.

Joyce said its storage systems under the Shark product lines were up by 5 percent during the quarter and that revenue overall for disk storage was up by 6 percent.

In remaining cautious about the company’s outlook for 2003, Joyce noted that analysts are largely undecided about when they think technology spending might start to return to higher growth levels. “There is greater confidence that the tech sector has steadied” as of the final quarter of 2002, he said. “We’re hoping that as we look into 2003, in the second half, we’ll actually start to see a little bit of an uptick.”

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