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By CNET Networks, 17 January 2003 09:00

NEWS By Ed Frauenheim IBM on Thursday beat analyst expectations for the fourth quarter on the strength of strong services revenue. The computing giant recorded profits from continuing operations of $1.9bn, including $405 million of net charges for the quarter. Earnings from continuing operations were $1.34 per share, excluding charges. The charges amounted to 23 cents per share. Fourth-quarter revenue from continuing operations reached $23.7bn, up 7 per cent year-over-year. Analysts polled by First Call on average had been expecting IBM to post operating earnings of $1.30 per share and revenue of $23.2bn. Revenue from IBM's global services unit rose 17 per cent year-over-year to $10.6bn. The company attributed the growth to its acquisition of consulting and technology services company PwC Consulting last year. "In one of the most challenging years in business, we delivered a solid quarter and finished the year strong. We continued to gain share in our core businesses and managed our company very well in a tough environment," CEO Sam Palmisano said. "At year end, IBM's financial position was strong enough for us to take the important step of fully funding the US pension plan." Palmisano noted that the company had strengthened its software offering through a number of acquisitions and said the integration with PwC Consulting is on track. In a conference call, IBM CFO John Joyce said the company is comfortable with analyst expectations for the current quarter of 9 per cent earnings per share growth and nearly 10 per cent revenue growth, both year-over-year. However, a consensus of analysts polled by First Call put earnings at 80 cents per share for IBM's March quarter, or growth of 9.6 percent year-over-year. In addition, the average revenue estimate for the quarter was $19.8bn, up 10.1 per cent year-over-year. Joyce said IBM can grow revenue and earnings for the full year even if overall IT spending levels fail to improve. But to achieve expectations of full year revenue growth in the high single digits and earnings growth of 10 per cent, Joyce hinted that IBM would need to see higher IT spending. Despite exceeding analyst expectations in the fourth quarter, IBM's earnings per share from continuing operations fell by 8.2 per cent year-over-year. In the year-ago quarter, the company reported $2.6bn in income from continuing operations, or $1.46 per share. For the full year 2002, IBM posted revenues of $81.2bn, down 2.3 per cent year-over-year, and profits from continuing operations of $5.3bn, down 34.5 per cent year-over-year. Under Palmisano, who took the reins of the company last spring, IBM has been promoting what it calls 'on demand' computing. The on-demand initiative focuses on building larger, more reliable computer networks that let companies buy computing power as a service or a utility, in the same way those companies purchase electricity. IBM is also realigning existing product and services offerings around the initiative. The computing giant has established an On-Demand group and committed $10bn to bringing the initiative to fruition through research and development, acquisitions and various company programmes. IBM also continues to focus on services products. Having acquired PwC Consulting last year for $3.5bn, IBM now trumpets its ability to help businesses run more efficiently through a combination of management advice and technology. The global services unit signed more than $18bn of business in the fourth quarter, IBM said. In late December, IBM announced a seven year contract with JP Morgan worth more than $5bn. Under the deal, the financial services giant will outsource to Big Blue a significant portion of its data processing technology infrastructure, including datacentres, help desks, distributed computing, data networks and voice networks. Earlier in the month, IBM announced a 10-year, $2.5bn contract to run Deutsche Bank's datacentres in continental Europe. Although hardware sales still account for about a third of IBM's revenue, the company has been moving away from the business of actually making computer devices. It sold off its money-losing hard disk drive business to Hitachi last year and recently announced it signed two contracts worth a total of $3.7bn to outsource manufacturing operations. According to the deals, outsourcer Sanmina-SCI will acquire IBM manufacturing operations in Mexico and Scotland, while Solectron will take over a facility in North Carolina that restores previously leased PCs and other information technology equipment. IBM also has axed employees to improve its profitability. Last year, it announced plans to eliminate 15,613 jobs, about 5 per cent of the roughly 300,000 people IBM employed at the beginning of 2002. Ed Frauenheim writes for CNET News.com.