IBM Surprises With Exceptional 4Q

The fourth quarter usually is the best time of the year for IBM Corp., but rarely does it look this good.

The technology company said Monday that its earnings per share in the quarter blew past analysts' expectations by 20 cents. IBM's executives felt the numbers were too good to sit on, so they released a peek at the results in advance of Thursday's full report for the quarter.

The news sent IBM shares up 5.4 percent, or $5.26, to $102.93 Monday.

The results were especially surprising given that economic conditions are not considered favorable. Recessionary fears loom. Hesitation on technology purchases by financial services companies -- IBM's largest customer segment -- hurt its third-quarter results.

So how did IBM stun analysts? Partly by betting big overseas, where most of the company's revenue comes from.

IBM would not elaborate on the quarterly results until Thursday's detailed report. But the company has made clear that it has been increasing its investments in developing countries with high growth rates, like China, India, Russia and Brazil.

IBM disclosed last month that its employee head count in those countries is nearly 100,000, up from 70,000 a year ago. The Indian market alone was expected to contribute nearly $1 billion in revenue to IBM in 2007, up from $700 million the prior year.

To better serve emerging markets and find higher pockets of growth domestically as well, IBM has been retooling its operations to focus more on sales to small and medium-sized companies. Annex Research analyst Bob Djurdjevic thinks those moves showed a payoff in the fourth quarter.

"It's kind of like an end-around play," he said. "You don't go head on into where the crisis is."

Weakness in the dollar also helped boost revenue, because deals done in other countries translate into more greenbacks. IBM said its revenue in the fourth quarter rose 10 percent to $28.9 billion, beating analysts' forecasts of $27.8 billion. The revenue rise would have been 6 percent if not for currency fluctuations.

IBM said its fourth-quarter earnings per share amounted to $2.80, easily beating the $2.60 expected by analysts polled by Thomson Financial. Taking out discontinued lines of business, IBM earned $2.26 per share in same period a year earlier, which means per-share profit rose 24 percent.

Until Thursday's complete report, however, it will be unclear how much of that gain came from business improvements and how much is due to the company's aggressive share repurchases. IBM expects buybacks to be a big reason it can drive earnings per share to $11 by 2010.

IBM said in Monday's release its full-year earnings were $7.18 in 2007, up from $6.11 a year earlier, or $6.06 on a continuing basis. Revenue rose 8 percent to $98.8 billion.

"They're on a roll," said Bobby Cameron, a Forrester Research analyst who credits IBM with doing a better job in recent years of integrating its operations in software, services and computer servers.

Djurdjevic believes that Wall Street analysts underestimated that trend and overestimated the effect that IBM would feel from problems in the financial industry.

"It's the most visible part of the economy, but it's not the economy," he said. "The market is now correcting itself on IBM."


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