See there is some good news out there

By JORDAN ROBERTSON
AP Technology Writer
 

SAN FRANCISCO (AP) -- In what promises to be a dismal year
for tech spending, IBM Corp. packed a wallop of a surprise
with its 2009 profit guidance: the numbers were so far ahead
of Wall Street's forecast they were initially met with
disbelief.

The Armonk, N.Y.-based company predicted at least $9.20 per
share in profit in 2009, a full 45 cents per share better
than the average estimate of analysts polled by Thomson
Reuters. The forecast is an extremely bullish statement by
IBM. It reflects the company's belief that it can
outmaneuver the financial crisis by focusing on services and
software deals that carry big profit margins, but also help
businesses cut costs by offloading some of their tech
chores.

IBM revealed the rosy forecast Tuesday as it reported profit
for the fourth quarter of 2008 that also sailed past analyst
estimates, while sales fell short.

IBM's net income for the period was $4.4 billion, or $3.28
per share. That amounted to a 12 percent profit increase
from $3.95 billion, or $2.80 per share, in the same period a
year earlier.

Analysts were expecting IBM to earn $3.03 per share this
time.

IBM shares jumped 4 percent in extended trading.

"To be honest, I didn't believe they could show something
like this - I think the results they posted were stellar,"
said Peter Misek, an analyst with Canaccord Adams. "They
just executed really well - really, really, really well."

Analysts had been expecting IBM to be hurt worse by its
heavy dose of sales to big banks and other customers
devastated by the economic downturn. Instead, IBM's results
show that while the company has seen some sales vaporize, it
is still able to wring out better profits because of
aggressive cost-cutting and by focusing only on the most
profitable deals.

One key measure of profitability - IBM's gross profit margin
- expanded to 47.9 percent of revenue, three percentage
points better than the year-ago period. IBM credits its
services business with leading the gain.

The higher profits came even as IBM's revenue fell 6 percent
to $27 billion, short of the $28.1 billion analysts were
expecting. IBM said revenue would have decreased only 1
percent were it not for currency fluctuations, but sales
were down in all major geographic areas.

Revenue in services, IBM's largest business segment, dropped
4 percent, but IBM was able to ink $17.2 billion in new
services contracts. That was a healthy showing that
demonstrates companies are still forking out for outsourcing
and other technical support contracts, which are often
viewed as money-savers in the long run.

Hardware revenue fell 18 percent. Mainframe revenue fell 6
percent, and sales of lower-end servers based on
industry-standard processors fell 32 percent.

Weakness in hardware sales was expected, since companies
don't buy as much new machinery when times get tough. But
even struggling businesses generally keep ponying up for the
services contracts they have locked into, since many of
those arrangements are for vital parts of the business, like
managing their billing or maintaining the databases.

Rick Hanna, an equity analyst with Morningstar Inc., said he
is concerned about the slowdown in some of IBM's hardware
sales, since having IBM machines inside a business helps
sell software and other services. Still, Hanna said he was
"very, very impressed" with IBM's ability to improve profit
margins despite the grisly economic landscape.

"When I was reading through it my first comment was 'wow,'"
he said. "It really speaks to them developing their
high-value-added strategy and executing it. ... You've got
to recognize that this isn't your father's IBM. It's not the
one that's so hardware-dependent. Software and services tend
to be more resilient, and they're proving that."

IBM did not announce widespread job cuts, which some
analysts believed were imminent, but repeated that it is
still doing targeted layoffs as part of ongoing
cost-cutting. IBM lays off thousands of workers each year,
but overall head count keeps rising as the company adds jobs
in faster-growing regions or more profitable divisions.

IBM employed more than 400,000 people at the end of 2008,
the first time in more than 20 years the company's work
force has swelled that big. The last time IBM employed a
work force that size, a severe downturn caused the company
to jettison many of those workers in waves of brutal
downsizing.

IBM shed more than 150,000 workers in the 1990s as the
company racked up nearly $16 billion in losses over a
five-year stretch.

For all of 2008, IBM earned $12.3 billion, or $8.93 per
share. That represents an 18 percent jump from a year ago.
Sales were $103.6 billion, a 5 percent increase.

The earnings report came out after IBM shares closed at
$81.98, down $2.94, or 3.5 percent. The stock jumped to
$85.30 in after-hours trading.