On January 15, IBM surprised the financial community by announcing its fourth quarter and year-end financial results several days ahead of schedule. That surprise turned out to be a pleasant one, as the company served up its first genuinely optimistic assessment of IT spending in several years.
IBM's upbeat outlook on the market was partly due to its fourth quarter financial results. For the period, the company's revenues grew 9.4% from $23.7 billion to $25.9 billion, with nearly every IBM division contributing to the revenue increase. Systems Group, which includes the iSeries, led the way with an 18% increase in revenues. The Personal Systems Group grew sales by 16%, Software Group boosted revenues by 12%, and Global Services grabbed an extra 8% in proceeds. For the year, IBM took in $89.1 billion in sales, up 10% from 2002.
While IBM's revenue figures were solid, they were fueled in part by favorable foreign currency conversions. During 2003, the dollar spent much of its time depreciating against the euro, yen, and other world currencies. This allowed IBM to repatriate its overseas revenues on very favorable terms. At constant currency, the company's revenues grew by only 1% during the fourth quarter and by 3% for the entire year.
This meager increase, however, did little to detract from IBM's achievements on the earnings front. For the fourth quarter, the company generated an income of $2.7 billion from continuing operations, a 42% increase over the same quarter last year. That increase capped a year in which Big Blue boosted income from continuing operations by 43% to $7.6 billion. It achieved these gains by cutting costs and boosting productivity on numerous fronts. For instance, the company slashed its sales, general, and administrative expenses from 23% of revenue in 2002 to just 20% in 2003. Besides sending profits to the bottom line, these structural changes will allow IBM to price its products aggressively during 2004.
Besides painting a solid profit picture, IBM encouraged investors with its prediction that revenues will grow faster in the future. In his comments to the press, IBM CEO Sam Palmisano stated, "The client buying environment is steadily improving." That assessment was underlined by company CFO John Joyce in a conference call with financial analysts, where he described 2004 as "the year when the IT industry will begin its next growth cycle." Joyce also predicted that IBM will experience long-term revenue growth in the "middle to high single digits." This was the first time in years that IBM offered a revenue forecast, much less an optimistic one.
IBM's growth expectations are leading the company to do some serious hiring during 2004. According to internal sources, the company expects to add 15,000 new employees over the next year. That figure is an increase over the 10,000 new jobs that Palmisano talked about creating a few months ago. If IBM lives up to its hiring forecast, it could have 330,000 employees one year from now. That would be the largest workforce since 1992, when the company began a painful decade-long restructuring.
The iSeries Outlook
While IBM's Systems Group turned in a solid performance during the fourth quarter, the iSeries did not lend much support to the effort. Though hardware revenues grew by 18% for the quarter, iSeries revenues grew by only 2%. This was the low point for iSeries sales growth in a year that started strong with a first quarter increase of 22%. As a result of the declining growth rate, iSeries revenues increased by 7% for 2003. In the process, according to Joyce, IBM gained about 2,500 new iSeries customers. That number was roughly half of IBM's objective for the year and was down from the 4,000 new customers that the server gained in 2002.
Fortunately, there is good reason to believe that iSeries sales will strengthen later this year. The current quarter may be somewhat disappointing, as many customers are holding off on purchases until IBM announces new iSeries models. However, if the company announces those models as expected in the second quarter of this year, orders could pick up substantially. Since the new models will support AIX as well as Linux and Windows, they will likely attract more new customers to the iSeries than previous editions. In addition, the improved performance and expanded partitioning capabilities of the new models will make them more attractive as workload consolidation platforms.
No matter what happens to the iSeries this year, there is one bit of good news we can take from IBM's financial results. If the company is right about 2004 being the start of the next spending cycle, many iSeries professionals could benefit from the new IT projects that such spending would generate. Those projects, combined with the new iSeries models, could make 2004 the year when many companies take a fresh look at what iSeries servers and iSeries professionals can offer them.
Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology. You can reach him at
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