This ain't your father's gray-suited, straightlaced International Business Machines (NYSE: IBM ) . It's not all about presenting a professional front and collecting payment on mainframe megacontracts. Today, Big Blue is all about building relationships with its customers -- large or small. And that makes a big difference on the bottom line.
IBM reported fourth-quarter earnings this week, with total sales dropping 6% year over year to $27 billion, but earnings per share expanding by 17% to $3.28. Adjust the results for currency exchange changes, and the revenue stays nearly flat at a 1% swoon. The hardware-hawking IBM of yesteryear would not have held up nearly that well. Importantly, it's the most profitable segments that are doing well.
While systems and technology sales turned a 20% whiter shade of pale amid our global financial crisis, the rest of the company fared much better with a mere 2-3% drop. Luckily, the hardware side of Big Blue's house only accounts for a small part of total business nowadays. High-margin software sales and highly renewable service contracts accounted for 80% of sales. On top of that, gross margins are expanding in the service and software segments -- but shrinking when it comes to hardware.
Company spokesman Doug Shelton says that "This profit improvement is the result of the transformation that IBM has undergone over the last 6 years." The Armonks moved out of low-margin businesses like PC systems (here, Lenovo, take this) and hard drives (hey Hitachi (NYSE: HIT ) , are you any good at this stuff?) and into "higher value services markets." Nowadays, mainframes and pSeries servers just sing backup behind real stars like online services platform WebSphere and collaborative productivity suite Lotus.
In the pursuit of new markets for these high-value products and services, IBM is aggressively selling to small businesses and local governments around the world. "We also reoriented our research organization to focus more heavily on our services business, having researchers work directly with services clients," says Mr. Shelton. Oracle (Nasdaq: ORCL ) and SAP AG (NYSE: SAP ) like to brag about multi-million-dollar deals, but an IBM press release is just as likely to talk about loosening up congested city traffic in Stockholm.
This puts a friendly, personal face on those stodgy old suits and ultimately gives IBM greater visibility of what users worldwide really want. It's a page ripped right out of Cisco's (Nasdaq: CSCO ) very capable playbook. Today, IBM competes more directly with service swami Infosys (Nasdaq: INFY ) than with server-happy Dell (Nasdaq: DELL ) . And that's a good thing.