International Business Machines (IBM - Free IBM Stock Report), a worldwide supplier of advanced information processing technology, communications systems, services, and program products, earned $4.18 a share in the December quarter, compared with $3.59 in the year-earlier period and our estimate of $4.00. For the full year 2010, the company recorded $11.52 a share, a 15% advance over 2009 earnings of $10.01 and ahead of our $11.40 estimate.

The company's revenues rose 7% in the December quarter, an acceleration over the 2%-3% pace of the prior two periods, with continued rapid growth in developing nations, up 17% on a constant currency basis. Revenue from computer systems advanced 22%, aided by an impressive 72% top-line advance from System z mainframe computers and a 15% increase in revenues from key branded middleware software. Services revenue rose only 2%, as business services advanced 4%, but technology services inched only 1% higher. Services signings of $22.1 billion included 19 deals of over $100 million each. The company ended 2010 with a services backlog of $142 billion, up $7 billion from the end of September.

IBM's expenses rose 7%, in line with revenue growth. Acquisitions accounted for four basis points of the increase. Workforce rebalancing charge decreases, gross margin expansions, by nearly one percentage point, and improvements in the software and systems groups keyed the gains. Losses from hedging currencies also declined sharply. A lower share count additionally contributed to the better-than-expected December-period results.

Finances remain strong. The company generated $8.7 billion of free cash flow in the quarter, excluding financing receivables, and $16.3 billion for the year. It spent $5.9 billion on acquisitions in 2010 and increased the dividend by 18%.

Looking ahead to 2011, IBM now expects to earn $12.56 a share this year, including acquisition charges of about $0.41 a share and retirement-related charges of $0.03. Systems revenue should benefit as more companies replace aging mainframe computers. And the increase in the backlog should support better services revenue. We are maintaining our 2011 share-net estimate of $12.60. Meanwhile, the company continues to strive for earnings per share of $20.00 by 2015. Even based on our 2013-2015 earnings projection of $18.00 a share, the stock is a solid selection for total return potential to mid-decade.

About The Company: International Business Machines is a worldwide supplier of advanced information processing technology, communication systems, services, and program products. 2009 revenues can be broken down as follows: Global Technology Services, 39%; Global Business Services, 19%; Systems and Technology, 17%; Software, 22%; Global Financing, 2%; Other, 1%. Foreign business accounted for 64% of 2009 revenues.


At the time of this article’s writing, the author did not have positions in any of the companies mentioned.