Weak $ helps IBM up Q4 profit

Eric Auchard

SAN FRANCISCO:IBM Corp. posted a quarterly net profit that beat Wall Street's recently raised target as solid year-end product sales were buoyed by a weaker U.S. dollar.

Shares rose slightly as IBM posted broad-based sales gains across all its major product lines, regional markets and target customer segments. But more than half of the growth was due to favorable currency effects instead of operating performance.

"We continue to see the global economy moving from economic recovery to moderate expansion, and we expect the IT market we serve to grow about four to six percent," CFO Mark Loughridge said in a conference call.

IBM reported net income of $3.1 billion in the fourth quarter, compared with $2.71 billion a year earlier.

"The earnings-per-share numbers were great," said Steve Neimeth, a portfolio manager for AIG SunAmerica who owns more than 100,000 IBM shares. "They even beat the highest 'whisper' number," he said, referring to unpublished, speculative Wall Street estimates that inform how investors respond to results.

"It looks like earnings were solid from top to bottom," Neimeth said. "As a bellwether for the industry, other technology stocks should rally on these earnings."

Revenue from continuing operations in the quarter was $27.7 billion, up seven percent from $25.9 billion a year earlier. But core growth, excluding the positive effect of translating foreign sales into a weaker U.S. dollar, was only three percent.

For the 2004 year, IBM reported revenue of $96.5 billion.

Analysts on average were looking for the world's largest computer company, based in Armonk, New York, to report earnings around $1.76 a share on revenue of $27.5 billion, according to Reuters Estimates.






Laura Conigliaro of Goldman Sachs said in a note to clients that currency translation accounted for $200 million in revenue, or about the amount by which IBM exceeded Wall Street's consensus sales expectations.

Wall Street's profit forecasts, which ranged between $1.74 and $1.78 a share, had inched up in recent weeks as analysts boosted their numbers to reflect the positive effect on earnings of translating overseas sales into U.S. dollars.

Earnings per share growth of 16 percent benefited from higher revenue, internal cost-savings, increased sales in such higher margin areas as emerging markets and business process services, and a shift away from less profitable areas like running computer operations for customers, CFO Loughridge said.

IBM also benefited from its ongoing policy of buying back stock to cut its total share count -- in effect, boosting reported profits by around two percentage points, after taxes.

Growth was led by its services business, which accounts for nearly half of all IBM revenues. Services rebounded off a slump in new bookings to post a 10 percent increase in sales, or 6 percent when the effect of a weaker U.S. dollar is discounted.

Signings of new service contracts rose to $14.7 billion, or $12.7 billion after subtracting the positive effect of currency translation. The figures show a recovery from the third quarter, which marked a recent low for new bookings of $9.8 billion. Estimated services backlog totaled $111 billion.

Hardware revenue rose four percent to $9.5 billion. Sales of mainframes declined four percent, in line with analyst forecasts. Its midrange iSeries line declined nine percent and storage products fell 11 percent, amid transitions to new products.

IBM's Personal Systems Group, made up mostly of the PC business IBM is selling to Lenovo Group of China, reported revenue growth of two percent to $3.5 billion, resulting in pretax income of $92 million -- in line with forecasts.

Loughridge said he expected IBM revenue, excluding the PC business, to grow slightly faster than Wall Street forecasts.

Analysts, on average, were looking for 2005 revenue growth around 5.5 percent. Loughridge said IBM revenue, without PCs, could grow a percentage point faster, or roughly 6.5 percent.

He said he was comfortable with current analyst profit forecasts that predict average growth of 11 percent in 2005.

"We think these estimates are reasonable," he said.