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IBM (nearly) hits $100bn in 2010 sales

Mainframe rebirth

It looks like there was a lot of pent up demand for IBM's System zEnterprise 196 mainframes. At least for the large banking, insurance, and manufacturing companies that tend to buy this big iron. In the fourth quarter of 2010, IBM's mainframe sales were the best that company has seen in six years. and they helped drive the company's sales up to $99.9bn, an increase of 4 per cent compared to the year before.

In the fourth quarter, IBM's sales rose 6.6 per cent, to just over $29bn, and net income rose by 9.2 per cent, to $5.26bn.

In further good news, IBM's Global Services behemoth saw a huge increased in signings, IBM's Software Group was up smartly, and other server and storage product lines did well. So for those on Wall Street who tuned in to the conference call with Mark Loughridge, IBM's chief financial officer, it looks like the 52-week high share price that Big Blue hit before the numbers came out can be justified. (Well, at least as much as any over-rated stock in the IT sector.)

"We completed an outstanding year, with record profit and free cash flow, and exceeded the high end of our 2010 earnings per share roadmap objective," said Sam Palmisano, IBM's president, chief executive officer, and chairman in his traditional statement. (Palmisano doesn't attend quarterly calls with Wall Street.) "We also capped a decade in which our shift to high-value businesses, our global integration of IBM, our investment in research and development of almost $60 billion, and our acquisition of 116 companies have helped us to nearly triple our EPS and return more than $100 billion to shareholders.

"As IBM enters its second century, we will continue to focus on our long-term strategic initiatives - growth markets, Smarter Planet Solutions, cloud and business analytics - as we drive to achieve our new roadmap target of operating earnings per share of at least $20 in 2015."

Maybe Big Sam will attend the call for the second quarter, which will mark IBM's centennial. (The old Computing-Tabulating-Recording company that eventually became International Business Machines was founded on June 15, 1911.)

Sales in IBM's Systems and Technology Group, which was actually merged with Software Group back in July 2010, is still reported as a separate entity in the Big Blue books. And in the quarter ended December 31, Systems and Technology Group boosted sales by 21 per cent, to $6.28bn. IBM doesn't provide revenue levels for its various server lines, but it does talk about sales growth and Loughridge told Wall Street that System z sales were up a stunning 69 per cent, driven by MIPS capacity growth of 58 per cent.

This is the best revenue growth for IBM's mainframes in six years, and it helped IBM post the best overall growth (at constant currency and ignoring its divestiture of its Product Lifecycle Management software tools to Dassault Systemes last year) in a decade. "We just had a great start to the System z rollout," Loughridge said on the call, adding that Big Blue inked deals with 24 brand-spanking-new mainframe shops.

IBM's Power Systems line was hurt by the recession, as all RISC and Itanium platform providers have been, and even with very good sales at the low end and the high end, where IBM updated its products last August, it was not enough to get any more than an anemic 2 per cent growth in the quarter. And that is with a pretty easy Q4 2009 compare, when the Unix server racket was still frozen thanks to the Great Recession and everyone knew Power7 machines were just around the corner and had stopped buying unless they really had to.

Loughridge said that nonetheless, IBM believed that its Power Systems business gained three points of market share in the quarter against its peers, the eleventh quarter in a row that it has gained share. Entry Power Systems sales were up 30 per cent in the quarter, thanks to the introduction of new low-end Power7 rack and tower servers last August, and the company was actually sold out of its Power6-based Power 520 machines and the Power7-based Power 720 and 740 machines. This may be more of a function of poor guessing as enthusiastic sales, of course.

IBM has many times before run out of entry PowerPC servers because managers are too conservative with their build plans. IBM's CFO said that midrange Power Systems machine had a 7 per cent sales bump in Q4, the third quarter of growth and that it did nearly 200 deals for its high-end Power 795 machines in the period, nearly triple the deals it did at the end of the third quarter. (This is to be expected, since the Power 795s shipped so late in Q3.) IBM did not provide revenue figures for high end Power System machines, but if entry boxes were up 30 per cent and midrange boxes were up 7 per cent, then high end boxes had to fall - and perhaps a lot - for the overall business to be up only 2 per cent.

Loughridge remained optimistic about the prospect for a Power7 resurgence in 2011. "We think we have a lot of momentum in all these elements," he said, referring to the low, mid, and high Power Systems products.

System x rack and tower and BladeCenter blade server sales (not including Power-based blades) had their fifth consecutive quarter of double-digit growth, with sales up 18 per cent across all products, The high-end System x servers, based on Intel's latest eight-core Xeon 7500 processors but also including a quad-socket box using the twelve-core Opteron 6100, rose by 30 per cent. Blade server sales for x64-based blades rose by 14 per cent. It is hard to say what IBM's entry and midrange x64 products did or didn't do, since the company rarely talks about it. But clearly there was some softness in there somewhere.

Within STG, storage product sales, including those based on flash, disk, or tape archiving, were up 8 per cent in the quarter. In the growth markets (such as China, Brazil, Russia, and India) storage hardware sales was up 23 per cent in constant currency. Chip sales rose by 30 per cent thanks to networking and game console chip baking, and even retail store hardware had 26 per cent revenue growth.

Software Group is still peddling more stuff than Systems and Technology Group, even with a stellar hardware quarter, but it is always important to remember how much of that software is tied to IBM hardware. (IBM doesn't divulge this number, of course, so you might remember the number different from me.) Software Group posted sales of just over $7bn, up 7 per cent. If you take out the effect of the PLM divestiture, software sales at IBM rose by 11 per cent.

The key branded middleware in the Software Group portfolio - WebSphere middleware, Information Management database and related tools, Tivoli systems management, Lotus groupware, and Rational development tools - accounted for $4.65bn in revenues, up 13 per cent as reported. WebSphere products - and man, are there a lot of them - had 32 per cent growth in Q4

Other middleware sales, mostly mainframe and AS/400 products, grew by 10 per cent to $1.2bn. Operating systems comprised around $700m in revenues. (That's an El Reg estimate based on IBM data, not an IBM reported figure.)

The Global Services behemoth continued to embiggen itself in Q4, and Loughridge was particularly pleased to report that total signings rose by 18 per cent, to $22.1bn, in the quarter. Global Services had $14.9bn in reported revenues in the quarter, up only 2 per cent, but with signings on the upswing and the backlog up $5bn, to $142bn, Big Blue is feeling pretty good about the prospects for services growth in 2011 as existing customers are spending more on services.

Global Technology Services, the division of the Big Blue services hairball that does outsourcing, systems integration, and hardware and software maintenance, had $10.2bn in sales, up 1.1 per cent, while Global Business Services, which provides business process re-engineering, consulting, and application management services, had sales of $4.76bn, up 3.9 per cent. Loughridge said that Global Services sales rose by 11 per cent in North America, the highest growth level in the quarter.

In the fourth quarter, Big Blue blew $2.9bn to acquire a bunch of companies, including Netezza, Unica, Blade Network Technologies, Clarity Systems, Open Pages, and PSS Systems; for the full year IBM spent nearly $6bn on acquisitions. IBM generated $8.7bn in free cash in the fourth quarter, and ended the fiscal year with $11.65bn in cash and equivalents, $3.7bn in long and short-term debt, and $22.4bn in debts associated with its Global Financing arm, which posted $628m in revenues in Q4.

For the full 2010 year, Global Technology Services had sales of $38.2bn (up 2.3 per cent), followed by Global Business Services with $18.2bn (up 3.2 per cent), Systems and Technology Group at $16.2bn (up 11 per cent), Software Group at $21.4bn (up 5.1 per cent), and Global Financing at $2.3bn (down 2.8 per cent). When you add it all up, that's $99.9bn in sales (up 4.3 per cent), and $14.8bn dropped to the bottom line (up 10.5 per cent).

IBM didn't give revenue projections for the first quarter or 2011, but Loughridge did say that IBM was on track to deliver at least $13 in earnings per share this year, up from $11.52 in 2010 and putting it right on track to reach $20 EPS by 2015. ®

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