IBM Makes More Money, Selling Less of What People Want

There are times when you just have to sit back and marvel at all the things IBM (IBM) does right. IBM, for example, has mastered the art of the CEO transition. It’s had three CEOs in the past 20 years, vs. Hewlett-Packard’s (HPQ) four CEOs in the last 30 months. IBM sold off low-margin businesses like PCs and hard drives ages ago and headed upmarket to services and software. HP and Dell (DELL) are still trying to figure out how to ape this strategy. IBM’s share price sits near its all-time high, while shares of HP and Dell have plummeted to the point that both companies have become targets for private equity companies and acquirers.

On Tuesday, IBM impressed yet again with the release of its fourth-quarter results. Well, in actual fact, it impressed by forecasting that earnings for 2013 will be at least $16.70 a share, a healthy notch above analysts’ expectations of $16.64 a share. Investors pushed IBM’s shares higher by about 3.5 percent to $202.87 a share in after-hours trading. And why not? IBM has once again shown it’s a profit-increasing machine.

So IBM is great, right? Well, not so fast.

IBM portrays itself as an ahead-of-the-curve technology company. At any chance, IBM will tout its growth in Brazil, Russia, India, and China—revenue was up 14 percent during the fourth quarter in those countries—as a sign that it’s chasing the future. And we’ve all seen the ad campaigns about IBM’s data analytics prowess and ability to deliver a smarter planet. This, friends, is a company on the move.

The message, though, gets harder and harder to square with IBM’s financial results. Its revenue for 2012 came in at $104.5 billion, down 2 percent from $106.9 billion in 2011. During the same period, IBM’s net income rose to $16.6 billion from $15.9 billion. It made more money selling less stuff.

IBM’s figures seem to match up better with a super-efficient retailer than a purveyor of technology. Even a giant technology company should increase sales by a healthy margin. This idea is sort of baked into the definition of being a technology company—people should want more of what you’re selling, and you should be offering disruption rather than maintaining the status quo.

IBM’s vaunted services business declined last quarter. So did its hardware business, as sales fell 1 percent to $5.8 billion. Things would have been really bad in hardware-land were it not for the mainframe division. It was the only one of IBM’s four main hardware units that actually increased sales during the fourth quarter. The mainframe—think about that for a minute.

When it comes to software, where IBM receives so much praise, sales rose 3 percent, to $7.9 billion. In the last five years, IBM has bought about 40 software companies, spending $7.4 billion alone for Cognos, SPSS, and Kenexa. IBM often gets plaudits for combining all the acquisitions into a well-functioning whole. That said, it’s hard to spot the runaway success story in IBM’s software mix or how this strategy has led to a major spike in revenue.

Give IBM credit for making more with less and selling itself as the solver of tough problems in “emerging markets.” But just remember that IBM’s sales in “major markets” actually fell 2 percent last quarter, and its revenue for all of 2012 is just a smidgen higher than the company’s revenue for all of 2008. One gets the feeling that the folks who have done business with IBM the longest aren’t buying the future IBM is selling.

BusinessWeek.com