IBM Ends 2003 Upbeat, Sounds Optimistic About 2004

IBM moved up its announcement of financial results a few days, to get ahead of the Martin Luther King holiday in the United States and possibly to talk about sales on the same day as rival Sun Microsystems, which is still struggling. After fighting back any temptation for optimism for years, IBM’s leaders allowed themselves a little optimism that an uptick in IT spending is under way. They stopped short of calling a turnaround–but just barely.

In commenting about the fourth quarter, Sam Palmisano, IBM’s chairman and CEO, gave the traditional statement about how Big Blue’s mix of products gave it the best advantages in the downturn and during a recovery. “This was a very good quarter for IBM and an encouraging end to a year in which we steadily gained momentum and posted record revenues,” he said. “With few exceptions, the company performed well across the board. The company’s performance would not be possible had we not made investments during the downturn and fundamentally repositioned IBM for leadership in the high-value enterprise space, which remains our sole focus. We enter 2004 with good momentum. The client buying environment is steadily improving. We are enthusiastic about our prospects for this year and beyond.”

That is about as close to calling a turn in IT spending as any CEO is going to do in the current economic climate. IBM’s chief financial officer, John Joyce, also seemed more upbeat than usual in discussing 2003 and prospects for the future for the IT industry in general and for IBM in particular. “In 2002 and again in 2003, we were cautious with our outlook for the information technology industry,” he explained. “We characterized the IT environment at that time as ‘tough’ or ‘remaining difficult.’ Based on our customer insight and our fourth quarter results, we feel that the environment is steadily improving.” As he closed his discussion of IBM’s results, he said that Big Blue had not been talking about the company’s long-term prospects because it was naïve to talk about growth when customers were not spending money. “No one really knew how long it was going to take for customers to work off the excess IT capacity of the late 1990s,” he said. “But in 2003, we said that the industry had stabilized, and I would characterize 2004 as a year when the IT industry will begin its next growth cycle.” He then added that over the longer term, IBM will grow revenues in the mid to high single digits and earnings per share in the low double digits (based on continuing operations metrics, not as reported numbers). This is the first long term forecast IBM has made publicly for several years.

Things just might be getting a little better–at least for IBM.

IBM’s fourth quarter results certainly indicated that. For the first time in a long time, IBM’s hardware revenues were the main driver behind growth in a quarter. IBM booked total sales of $25.9 billion in the quarter, up 9.4 percent. Total hardware sales were up 12.1 percent to $9.1 billion. Software sales were $4.25 billion, up 11.8 percent, and services sales were just under $11.5 billion, up 8.3 percent. IBM’s financing sales, which are driven primarily by dealer and customer leasing and financing of its hardware, software, and services, were down 11.5 percent to $734 million. Net income for the fourth quarter came in at $2.7 billion, or $1.55 per share, an increase of 163 percent over last year’s fourth quarter, which was diminished by charges related to the acquisition of the PricewaterhouseCoopers consulting business and to the shuttering of disk drive and selected chip making operations in IBM’s Technology Group.

For the full 2003 year, IBM’s sales were $89.1 billion, up 9.8 percent, and net income was $2.06 per share. Based on IBM’s statements, Wall Street will probably raise its expectations for IBM this year. The consensus prior to the announcement of Q4’s results was that IBM could grow sales by about 5 percent to about $93.6 billion and would bring about $4.90 per share to the bottom line.

On a divisional basis, the optimism was running pretty high in IBM’s Systems Group, particularly with the zSeries crowd. Systems Group booked revenues of $4.9 billion in the fourth quarter, up 18 percent as reported (only 8 percent at constant currency). zSeries mainframe sales, driven by a greater-than-expected uptick in sales from the “T-Rex” zSeries 990 server, which was stalled by the lack of some cryptographic features that the financial services industries require, rocketed up by 33 percent in the quarter (constant currency). MIPS shipments in the fourth quarter were up 62 percent, driven primarily by T-Rex. The question now, of course, is will demand hold for the zSeries in 2004 and beyond. For all over 2003, zSeries sales were only up 7 percent. Joyce said that sales of the pSeries Power-based Unix server line was up 12 percent in the fourth quarter and up 13 percent for all of 2003. The related iSeries Power-based midrange platform saw sales grow modestly at 2 percent in the fourth quarter, and grew by 7 percent for the year. Joyce said that the iSeries added 2,500 new customers in all of 2003, about half of the goal that the company had been shooting. IBM added about 4,000 new iSeries shops in 2002. Joyce said further that one quarter of current iSeries machine ship with an Integrated xSeries Server co-processor for running Windows environments under the skins of the iSeries or an Integrated xSeries Adapter card to link external xSeries machines to the OS/400 platform in a hybrid complex. IBM’s Intel-based xSeries line showed 20 percent revenue growth and 40 percent shipment growth in the fourth quarter, and 17 percent revenue growth for the full year. Joyce said that shipments of eight-way and larger “Summit” xSeries servers were up 48 percent in the quarter, and shipments of uniprocessor and two-way machines were up 45 percent. Storage sales were up 14 percent across disks and tapes, with disk sales up 9 percent and tape up 21 percent in the quarter.

Global Services, which is the darling unit for IBM as far as Wall Street is concerned in recent years, only saw sales grow by 8 percent to $11.4 billion in the quarter, and sales were down 1 percent at constant currency. IBM booked $17.3 billion in new services contracts in the fourth quarter–which was a lot higher than expected, which comforted as much as shocked some Wall Street analysts who were talking much lower numbers only a few weeks ago. IBM estimates its backlog of services deals (including maintenance, outsourcing, consulting, and systems integration) at $120 billion.

Software Group did more or less as expected, with sales of $4.3 billion, up 12 percent for the fourth quarter as reported (only 2 percent at constant currency). Operating system sales rose by 6 percent to $683 million, and Joyce said that middleware sales (which accounts for all the rest) were up 14 percent in the fourth quarter. Sales of middleware products on zSeries and iSeries machines–so-called “host” servers–were up 10 percent, while sales of middleware for Unix, Windows, and Linux platforms–which IBM calls “distributed” platforms–were up 16 percent. Sales of WebSphere application server and related products were up 10 percent in Q4, but DB2 database sales were only up 3 percent and Lotus Domino messaging and groupware software sales were only up 2 percent. However, Tivoli systems management and security products increased by 17 percent compared to a weak Q4 2002.

Technology Group continues to be a laggard for IBM, with revenues of around $1 billion (including about $200 million of sales to other IBM units, mostly Systems Group), down 18 percent for the quarter and losing $34 million. However, without Technology Group, there is no Power processor, which is the heart of its server business and the deals it has signed with Microsoft, Nintendo, and Sony for their next-generation game machines. IBM says that Technology Group will be profitable in 2004, but expects that the first quarter will be weak. The Personal Systems Group, which handles IBM’s PCs, workstations, and printers, brought in $3.5 billion in sales, up 16 percent (8 percent at constant currency). Sales of ThinkPad notebooks were up 35 percent, but desktop sales were down 6 percent. Nonetheless, PSG booked a $9 million profit after loosing money for many quarters.

Joyce said that IBM saw growth in all geographies when looked at in their broadest categories, but sales in specific countries were not always so brisk. Sales in the Americas region for the fourth quarter were $10.6 billion, up 4 percent as reported (1 percent at constant currency). Within this region, Joyce said that sales were stable in the United States, declined in Canada, and were strong in Brazil. Performance in Europe was mixed, with Germany picking up a bit, decent in Eastern Europe, but dropping in the United Kingdom. Japan, which accounts for about 60 percent of IBM’s Asia/Pacific sales, had flat sales in the quarter, with the southeast Asian nations having the strongest growth in the area, followed by China and Australia.