IBM Reports Strong 4Q05 Earnings Despite Revenue Fall (IBM)

 |  Includes: HPQ, IBM

IBM reported yesterday after the close that 4Q05 earnings rose 13% y/y, despite a 12% drop in y/y revenue. The stock is unchanged after hours, pressured by the poor earnings reports at Intel and Yahoo [see historical responses to IBM earnings]. We've posted the full conference call here. The key numbers for IBM's 4Q05:

Net income: $3.19 billion or $1.99/share (4Q04: $2.83 billion or $1.67/share)
Revenue: $24.43 billion (4Q04: $27.67 billion) [Note: The bulk of this revenue drop is due to IBM's sale of its PC business to Lenovo. Excluding PCs, revenue fell just 1%.]
Gross profit margins: 44.1% (4Q04: 38.8%)

Some responses, via the Wall St. Journal:

The quarter's performance raised the question perennially asked of IBM: How does the giant grow? The revenue figures, particularly in services, were "disappointing," says Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co. "The services business is not as healthy as it ought to be." At the same time, he notes, IBM "found ways to really deliver strong cash flow and earnings growth."...

IBM has struggled to find a services formula that delivers reliable growth, particularly as the business becomes more crowded. Long-term outsourcing deals are highly variable, and surging Indian firms are adding evermore competition. And IBM reported difficulty in the fourth quarter signing short-term deals, particularly those to provide more basic functions, such as hardware setup or information technology support. It faces competition there, too, from the likes of Hewlett-Packard Co., which has placed a focus on services. Even IBM's high-value consulting unit saw revenue shrink 6% in the fourth quarter...

"Profit margins improved quite nicely, and not all from restructuring," said Cindy Shaw, an analyst with Moors & Cabot. "It definitely says they are executing better."

IBM 1-yr chart: