IBM Defies Economy As Profit Rises 17%; Outlook Beats Views

• J. Bonasia
• On 6:23 pm EST, Tuesday January 20, 2009

IBM beat fourth-quarter earnings estimates Tuesday and predicted a surprisingly solid 2009 profit, vowing to offset sharply weaker sales by holding down its own spending.

For the quarter, IBM (NYSE:IBM - News) earned $3.28 per share, 17% over last year and 8% over the average estimate of analysts polled by Thomson Reuters. Sales fell 6% to $27 billion, 4% below views. Accounting for currency changes, sales fell 1%.

"This was a very strong quarter," IBM's Chief Financial Officer Mark Loughridge said in a conference call, citing record profit, earnings per share and free cash flow. "The fourth quarter wrapped up an exceptional year."

For 2009, IBM expects earnings to rise 3% to $9.20 per share. Analysts had expected flat profit growth in 2009, with an earnings forecast for $8.75 per share.

IBM shares rose 4% in after-hours trading to around 85.30.

Loughridge vowed to hold down expenses through "structural changes," but won't say whether that included rumored layoffs of up to 16,000, or 4% of its work force.

IBM's short-term contracts "evaporated" at the end of December, according to Peter Misek of Canaccord Adams.

"Massive layoffs (are) coming," Misek predicted in an e-mail exchange.

Last month, BMO Capital Markets lowered its stock price target for IBM on weaker hardware and software sales. Though analyst Keith Bachman rates the stock outperform, or buy, he said there's "no escaping the economic gravity" of the financial crisis.

That concern was echoed by Bill Shope of Credit Suisse, who rates IBM shares market weight, or hold.

"We fear that tightening enterprise conditions could increasingly permeate IBM's operating results in the first quarter and throughout 2009," Shope wrote in a research note.

As the financial crisis deepened in the fourth quarter, investors have watched carefully for clues about how it would affect tech spending this year. Before Tuesday's earnings news, IBM stock had tumbled 37% since reaching 131 per share last September.

Tighter credit markets and a growing global recession in developed economies could result in flat or even reduced spending for the whole tech sector in 2009, according to Drake Johnstone of Davenport & Co. He cut his full-year earnings and price estimates for IBM, but still rates the stock a buy.

"IBM is better suited to withstand the global economic downturn than other leading technology companies, since the company obtains more than 50% of its revenue from long-term recurring software and maintenance contracts," Johnstone wrote, adding that IBM gets 65% of its revenue from foreign markets.

IBM's Loughridge says demand for computer hardware is "clearly more susceptible to a downturn" than the firm's bread-and-butter software and services businesses.

He says hardware makes up just 9% of IBM's total profit vs. 40% from software and 42% from services. The remaining 9% comes from its customer-financing business.

IBM's technology services revenue fell 4% in the fourth quarter. Without currency changes, sales would have grown 3%.

Business services fell 5%, or were flat when adjusting for currency. Services are IBM's largest source of revenue, so any slowdown in new contracts could signal trouble ahead in the coming year.

Sales of software, IBM's most profitable business, rose 3% over the year before, or 9% in constant currency. Sales of computer hardware, IBM's least profitable product line, plummeted 20% -- or 16% adjusting for currency -- to $5.4 billion.

Sales in the Americas fell 2% to $11.5 billion in the quarter, but would have risen 2% in constant currency. Sales in Europe fell 12%, or 1% adjusting for currency, to $9.5 billion.

Quarterly sales in the Asia-Pacific region fell 1% to $5.5 billion. In constant currency, that would have been a 1% gain.

"We have changed the profile of our business to make it more adaptable," Loughridge said. "We are entering the current market from a position of strength."

Buzz up!