IBM put in another characteristically solid quarter in Q4 of 2011. There was little growth to speak of across the business as a whole, but earnings improved yet again and were slightly above expectations. IBM stock is up 3% in after hours trading.
Total revenue for the quarter reached $29.5bn, up 1% at constant currency year-on-year. Pre-tax income rose 6% to $7.4bn, meaning the pre-tax profit margin improved by 90 basis points to 25.1%. Software was yet again the shining star on profits and growth, with a 9% revenue gain globally. We’ll have more analysis on IBM’s acquisition-assisted software performance in a subsequent post.
The systems and technology division underlined the persistently tough product procurement conditions with an 8% drop in revenue to $5.8bn, albeit against a strong Q4 of 2010. But the fundamental reason IBM isn’t growing much overall is its services business. Still accounting for more than half of IBM’s total revenue, services nudged up its profitability but only returned a 2% rise at constant currency in Global Business Services and 3% in Global Technology Services.
Looking forward, the question is where future services growth is going to come from. The total services contract backlog ended the quarter flat year-on-year at constant currency. So, for 2012, IBM says that a little over 70% of its expected services revenue can be projected from that backlog, and that it can make up the rest from new signings and growth within its base. Two challenges should be highlighted here. Firstly, IBM’s outsourcing base is being attacked like never before and many clients across the industry are on seeking lower-cost ways of delivering IT services (see for example HCL bags a win at AstraZeneca). Secondly, the discretionary spend that IBM requires to grow its consulting and projects business remains in short supply in most of its largest geographic markets.
One answer to the services growth question is of course emerging markets. Overall for IBM in Q4, the company’s “growth markets” grew constant currency revenue by 8%, with the BRIC economies up 11%. Performance in the “major markets” was flat. That said, IBM CFO Mark Loughridge did highlight the pleasing numbers from the UK in his comments to analysts yesterday evening. The UK had an excellent quarter, with 9% revenue growth overall. That is certainly a market share enhancing performance in current conditions. Loughridge underlined that this was the ninth consecutive quarter of growth for IBM UK. We look forward to bringing further comment on the UK performance when we've heard more from the folks at IBM UK.
Another growth source is what IBM terms General Business (i.e. accounts with typically less than 5000 seats, so below its classic sweetspot with very large organisations). Growth here was 7% in the quarter and 8% for the year. IBM is hungry for continued growth in this segment, so it’s an area we’ll keep an eye on (see our note IBM’s big ambitions with smaller accounts).