That good ole annuity-style revenue stream, which accounts for a little more than half of IBM’s sales in any given quarter, was gurgling and burbling along in the first quarter of 2008, helping to float the company’s product sales and delivering pretty hefty overall revenue and profit increases considering the shaky nature of the economy in the United States. And lucky for Big Blue, three-quarters of its revenues come from outside the United States, which means the weak dollar amplifies overseas sales when they are brought back to IBM HQ.
Look at how much the weak dollar helps. Sales across all product and services lines for IBM rose by 11 percent to $24.5 billion in the first quarter of 2008, but if measured in their local currencies where the deals actually got done and booked in IBM’s various units, sales would have only been up 4 percent compared to sales in the first quarter of 2007. Gross profits for the quarter rose by 14.7 percent to $10.2 billion, and net income rose by 25.7 percent to $2.3 billion. That works out to $1.65 per share, up 36.4 percent compared to net earnings per share in the first quarter of 2007, which was bolstered by IBM’s ongoing and aggressive share buybacks. The $4.9 billion acquisition of business intelligence software maker Cognos and those share buybacks emptied IBM’s cash coffers a bit, with cash down to $12 billion from the $16.1 billion the company had in the bank at the end of 2007. IBM expects to spend $12 billion this year on stocks, and cash flow from operations was sufficient to handle most of the stock buybacks in the first quarter.
IBM’s president, chief executive officer, and chairman, Sam Palmisano, made his customary appearance in the press release announcing the financial results but was, as usual, nowhere near the conference call that Mark Loughridge, the company’s chief financial officer, held with Wall Street analysts after the market closed on Wednesday.
“IBM had a very good quarter and a good start to 2008,” Palmisano explained in the release. “These results reinforce our confidence in IBM’s ability to perform well in a dynamic global economy. Our performance is a tribute to the way we have repositioned our company over the past several years, as well as the hard work of IBMers across the globe. IBM is a different company today, with a number of unique advantages: our global reach and scale, our strength in profitable growth segments, strong recurring revenue and profit streams, products and services that create real value for clients, and the discipline and financial strength and flexibility that enables us to adjust our business model as conditions require. We feel good about the rest of the year.”
It remains to be seen if the rest of us out there in the world do, but apparently there are enough good vibes among the 6,000 top global companies that drive IBM’s businesses and the several hundred thousand smaller companies that make up the foundation of IBM’s reseller channel sales for Palmisano and his peers at those companies to be optimistic. Here’s to hoping that the optimism spreads . . . .
While IBM positions itself as a services and software company, the reality is and will continue to be that its mainframe, Unix, i5/OS, Linux, and Windows systems drive a substantial portion of its business, including hardware, software, and services components. If you wanted to be fair, IBM should include operating system and middleware sales relating to its own platforms with those platforms, but because IBM wants to be thought of as a software player like Microsoft and Oracle (which it most certainly is), the company breaks the software that only runs on its own hardware to make Software Group look good. Ditto for services. A lot of what Global Services does today for a fee is the kind of things IBM used to provide for free when machinery was orders of magnitude more expensive per unit of performance than it is today. And that is why a discussion of IBM’s systems business is always an important starting point for any discussion of any quarter of sales at Big Blue.
