IBM Sees Momentum Continuing In 1998 Earnings - InformationWeek

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IBM Sees Momentum Continuing In 1998 Earnings

IBM yesterday reported fourth-quarter revenue of $25.1 billion, nearly 6% better than the same quarter a year ago; net income of $2.3 billion, 12.1% better than a year ago; and earnings per share of $2.47, besting analyst estimates of $2.45.

For all of 1998, revenue was $81.6 billion, up 4% over 1997, with net income of $6.3 billion, also up nearly 4% from a year ago. IBM's software, services, and maintenance now make up half of total revenue and 60% of profits. The company spent $700 million last year in acquisitions of software and services firms.

IBM's improved performance for the second half of the year is likely to continue into 1999, says Doug Maine, CFO of IBM. The worldwide IT industry is projected to grow 8% or more next year, although he noted that economic difficulties in Asia and Latin America, as well as the year 2000 computer problem, could impact growth.

Product introductions next year, including a new AS/400 in February and the next version of the S/390, the G6, should keep momentum building. In addition, Maine points out that PCs and servers gained a point of market share in the fourth quarter. "We are not where we want to be, but it feels a lot better than it has for several years," Maine says, adding that morale among server employees is high and "they feel like winners."

Software revenue for the fourth quarter was up 9.4% to $4.1 billion, with nearly two-thirds of that coming from IBM's middleware products. Vertical-industry solutions were down, and IBM has decreased investment in the area. IBM shipped more than 5 million Lotus Notes seats in the quarter, for a total of 34 million Lotus Notes seats. Software gross profit margins rose more than 3 points to 75.2%.

Services grew 20% to $7.1 billion with $9 billion in new multiyear contracts signed during the quarter, building the backlog of services contracts to $51 billion. IBM signed 11 megadeals--contracts worth more than $100 million--during the quarter, ending the year with a total of 38 new megadeals. Among the most recent is a five-year, $300 million software-development pact with Ford Motor Co.

Hardware sales were down 1.5% to $11.3 billion. While S/390 sales picked up after the introduction of the G5 in the second quarter, prices were down. RS/6000 and AS/400 revenues were down for the quarter, but storage sales were up.

Before the earnings announcement, which was made after the market closed, a Merrill Lynch projection that IBM stock could reach $240 helped boost the stock by 2-1/2 points to $197.

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