Adala blog

IBM's net tops Street; outsourcing deals pick up

SAN FRANCISCO – IBM Corp. rode rising business interest in outsourcing and soaring sales of its new System Z mainframe computer to report a fourth-quarter profit Tuesday that was better than analysts expected.

As corporations spend more to upgrade their computer systems, that has benefited companies like IBM that specialize in corporate sales, even though consumer demand for electronics is lagging and other companies' results have been hurt.

Because it mainly sells to businesses and large organizations, IBM's results aren't a perfect gauge of the health of the overall technology world. But its 9 percent increase in net income and 7 percent increase in revenue demonstrate the strength of corporate tech spending, a market that was eviscerated during the Great Recession.

IBM said after the market closed that its net income was $5.26 billion, or $4.24 per share, topping analysts' projections for $4.08 per share. A year earlier, it earned $4.81 billion, or $3.65 per share.

Revenue was $29.02 billion. Analysts expected $28.18 billion, according to FactSet.

The company also offered a brighter outlook for 2011 than analysts expected. IBM is signing more new service contracts, including a 24 percent jump in the value of outsourcing agreements inked in the fourth quarter.

The stock rose $3.60, or 2.4 percent, to $154.25 in extended trading.

IBM's outsourcing business had declined the previous three quarters, compared with the same periods a year earlier, a trend that worried analysts.

Outsourcing, including technical jobs like running call centers or maintaining computer servers for other businesses, typically makes up more than half of all new services deals for IBM.

Analysts say Accenture and other rivals are gaining ground on IBM in that area. But IBM points to its backlog of total services deals that stood at $142 billion on Dec. 31, $5 billion over the year before.

Revenue from mainframe computers jumped 69 percent; this was the first full quarter in which IBM sold the System Z mainframe.

Still, IBM's profit engine is its software business. Pre-tax income from software rose 4 percent to $3.17 billion in the fourth quarter.

Business software is lucrative for IBM. Retailers, for example, use IBM programs to mine their sales receipts for patterns that help discover and market their most profitable products.

Intel Corp. CEO Paul Otellini said last week when his company reported its earnings that it too was getting a lift from corporations upgrading old systems, a multi-year process he said is probably less than halfway done.

Companies are swapping out old PCs, replacing servers and storage machines and inking new outsourcing contracts or renegotiating old ones.

Gartner Inc. expects worldwide spending on information technology to hit $3.6 trillion in5 percent increase over 2010.

For 2011, IBM expects net income of $13 per share, excluding one-time items. Analysts polled by FactSet expected $12.65 per share on that basis.