IBM Earnings Benefit From Weak U.S. Dollar - InformationWeek
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04:24 PM

IBM Earnings Benefit From Weak U.S. Dollar

Some analysts worry that IBM's unexpectedly strong fourth-quarter results mask weaknesses in the computing giant's business.

Unlike American vacationers abroad, IBM appears to be benefitting from the anemic greenback -- but favorable exchange rates may be masking some weaknesses in the computing giant's business.

IBM surprised analysts Monday by announcing that fourth-quarter earnings and sales came in well ahead of expectations.

In a preliminary report, the company said earnings per share for the quarter were $2.80, up 24% from the same period a year ago. Revenue was $28.9 billion, up 10%.

On average, analysts surveyed by Thomson Financial were expecting IBM to report fourth-quarter EPS of $2.60 on revenues of $27.8 billion.

What happened?

IBM noted that sales for the quarter would have increased just 4% were it not for favorable currency exchange rates.

The company also said that sales for all of 2007 rose 8% to $98.8 billion -- but acknowledged that the increase would again have been just 4% if exchange rate gains were excluded.

More than half of IBM's revenue is in foreign currency, a fact that helps the company's financial reports when those sales are converted back into U.S. dollars -- which in the past year have slipped sharply against most other major denominations.

IBM CEO Sam Palmisano made no secret of foreign sales' increasing importance to his company. "The broad scope of IBM's global business -- led by strong operational performance in Asia, Europe, and emerging countries -- drove these outstanding results," said Palmisano, in a statement Monday.

But IBM's preliminary earnings report raises some flags.

The company's currency-adjusted revenue gains of 4% for both the fourth quarter and the full year 2007 pale in comparison to the double-digit gains consistently reported in recent quarters by offshore providers of outsourcing services -- a market on which IBM depends for about half its total revenues.

IBM's stagnating growth also suggests that sales of new products and services gained through the dozens of acquisitions that the company has made in recent years (nine announced deals in 2007 alone) are barely keeping pace with the fall off in sales of older technology -- such as mainframe computers and other legacy hardware -- on which IBM continues to rely heavily.

Indeed, IBM recently reported that sales of mainframe systems plunged 31% in the third quarter.

IBM on Monday did not provide a breakdown of sales by product line. It said it plans to release more detailed results for the fourth quarter and 2007 when it issues a full earnings report on January 17.

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