IBM Announces 4Q2011 Earnings

Let's get right to the point: the mainframe had what's called a "tough compare" in the last quarter of 2011. A year ago, IBM's System z hardware revenues grew an impressive 69 percent year to year as the zEnterprise 196, with the world's fastest microprocessor, won tremendous favor among existing and new customers alike. That was probably the mainframe's best quarterly hardware revenue growth performance in history, at least when excluding the mathematically infinite growth rate in the long ago quarter when IBM shipped its first mainframe.

Every serious analyst forecasted that IBM's mainframe hardware revenues would be lower in 4Q2011 compared to 4Q2010, and that's what happened. However, there's an interesting and exciting twist. IBM had very nearly the same blockbluster quarter in terms of mainframe hardware capacity shipments that it did last year: MIPS shipments were down only marginally (4 percent). Moreover, the mainframe's gross profit margin was up. Profit is the mother's milk of R&D investment decisions for any corporation, especially a publicly traded one. And, with the application of simple mathematics, it's clear mainframe customers yet again enjoyed substantially lower per-MIPS pricing.

As I always point out when IBM announces earnings — and this time is no exception — mainframe hardware revenues are but a tiny part of IBM's, never mind the industry's, total mainframe-related revenues.

IBM's broader financial results are also quite interesting. While several other technology vendors — including Oracle, HP, and Microsoft — are reporting poor (or at least subpar) financial results, IBM didn't. So far IBM has proven to be remarkably resilient during economic downturns. In fact, there have been many times when IBM has turned recessions and depressions into competitive advantages. In one of the most famous historical cases, IBM's CEO Thomas Watson Sr. refused to reduce the size of his company or cut production during the Great Depression in the 1930s. IBM then was uniquely well positioned to win the new U.S. Social Security Administration's business to solve what was then the world's largest accounting problem. That business strategy was a huge, calculated gamble, but it certainly paid off for the company.

Anyway, this sort of earnings report is exactly what I like to see in a technology company. A company with stable, predictable growth in profits is extremely well positioned to make the long-term investments in research and development to assure a steady stream of exciting, useful technology products at competitive prices, including mainframes and mainframe software. Let's hope IBM keeps up its performance, but to date they're doing well.

by Timothy Sipples January 20, 2012 in Financial


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