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IBM bucks recession with strong financial results for Q4

IBM has issued largely positive fourth quarter financial results and a strong 2009 profit prediction despite the global economic downturn.

Although overall revenues dropped 6% to $27bn, they would have been down only 1% had it not been for the strength of the dollar.

Net income for the quarter rose 12% on the same period in 2007 to $4.4bn, or $3.28 per share, which was above market expectations of $3.03 per share.

IBM expects profit in 2009 of $9.20 a share, which is above market predictions of $8.75. IBM said it expects to achieve profits of up to $11 per share in a few years.

The value of the company's shares, which dropped by about 22% in the fourth quarter of last year, rose 4.6% in after-hours trading in response to the results.

The positive results show that IBM is responding well to the challenging external conditions by shifting the business mix to higher-margin categories, said Carl Claunch, an analyst at Gartner.

Hardware revenue is down to about 9% of total revenue. Software, which has the highest margins, is the highest pre-tax contribution.

"Software is now 24% of IBM's total revenue, but has contributed 43% of the pre-tax income this quarter," said Claunch.

Services are similarly good contributors and are a growing part of the IBM mix. IBM has said that it is on a multi-year plan to improve results by generating half of all pre-tax income from software.

The decline in IBM's hardware business is mainly due to increased competition in the blade server market, where innovation gave IBM some buffering from tight industry margins in the past.

"Now, with HP and others producing very competitive blade systems, the pricing premium for IBM has largely disappeared and differentiation is lessened," said Claunch.

Unless IBM can find new innovation to re-establish some protected subdomain inside x86, the company's hardware business will continue to be a challenge, he predicted.

IBM's hardware business has also been hit by customers stretching the life of installed servers, with some using virtualisation to run as many applications on each server as possible.

The positive fourth quarter results are likely to have given hope to thousands of IBM employees still waiting to hear if the company will go ahead with plans to cut US jobs to reduce costs.

According to postings by members on the employee union's website, 16,000 job cuts were planned, and an official announcement is expected this week.

The Alliance@IBM union has called on the company to save US jobs by halting plans to outsource parts of the business offshore.


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