Diluted earnings per share for the fourth-quarter 2005 were $2.11, excluding this one-time charge. Fourth-quarter income from continuing operations was $3.2 billion, including the one-time charge for pension changes. This compares with $2.8 billion in the fourth quarter of 2004. Without the one-time charge, income from continuing operations of $3.4 billion in the fourth quarter of 2005 increased $541 million, or 19 percent versus the comparable period last year.
Total revenues for the fourth quarter of 2005 of $24.4 billion decreased 12 percent (8 percent, adjusting for currency) from the fourth quarter of 2004, which includes revenue from the divested PC business. Excluding the PC revenue, revenues decreased 1 percent (up 3 percent, adjusting for currency) compared with the fourth quarter of 2004.
Samuel J. Palmisano, IBM chairman and chief executive officer, said: “IBM finished the year with another strong quarter. We had solid performance in systems, middleware and business transformation services, which grew over 25 percent for the year. Our cash position remains very strong, and we saw impressive growth in important parts of our business. We continued to make gains in emerging markets and in important sectors such as healthcare and transportation, and our microprocessors are powering the fast-growing home entertainment market.
“Gross profit margin improvement in the quarter of more than 5 points demonstrates the benefit of our strategic focus on more profitable, high-value segments of the IT industry, as well as our continued emphasis on productivity and global integration. IBM’s business model is much more balanced and profitable than it was just a few years ago.
“IBM is ready for 2006, as we continue to deliver on our agenda of driving innovation and transformation for our clients and their businesses.”
Fourth-quarter revenue was a decrease of 12 percent (up 3 percent, adjusting for currency and the divested PC business). From a geographic perspective, the Americas fourth-quarter revenues were $10.5 billion, down 6 percent as reported (up 3 percent, adjusting for currency and PCs) from the 2004 period. Revenues from Europe/Middle East/Africa were $8.3 billion, down 16 percent (up 2 percent, adjusting for currency and PCs). Asia-Pacific revenues decreased 22 percent (down 3 percent, adjusting for currency and PCs) to $4.5 billion. OEM revenues were $1.1 billion, up 35 percent compared with the 2004 fourth quarter.
Revenues from Global Services, including maintenance, decreased 5 percent (1 percent, adjusting for currency) to $12.0 billion in the fourth quarter. IBM signed services contracts totaling $11.5 billion and ended the quarter with an estimated services backlog, including Strategic Outsourcing, Business Consulting Services, Integrated Technology Services and Maintenance, of $111 billion.
Hardware revenues decreased 27 percent (25 percent, adjusting for currency) to $6.9 billion in the fourth-quarter 2005 compared to $9.5 billion in the year-ago period, which includes revenue from the divested PC business. Hardware revenues without the PC business increased 6 percent (9 percent, adjusting for currency).
Hardware revenues for the Systems and Technology Group totaled $6.8 billion for the quarter, up 6 percent. Revenues from the zSeries mainframe product increased 5 percent compared with the year-ago period. Total delivery of zSeries computing power, which is measured in MIPS (millions of instructions per second), increased 28 percent. Revenues from the pSeries UNIX servers increased 4 percent; however, revenues from the iSeries midrange servers decreased 18 percent and xSeries servers were flat. In addition to the eServers, revenues from Storage Systems increased 24 percent and Microelectronics increased 48 percent.
Revenues from Software were $4.6 billion, flat (up 3 percent, adjusting for currency) compared with the fourth quarter of 2004. Revenues from IBM’s middleware brands, which include WebSphere, DB2, Tivoli, Lotus and Rational products, were $3.7 billion, up 1 percent versus the fourth quarter of 2004. Operating systems revenues decreased 6 percent to $656 million compared with the prior-year quarter.
For the WebSphere family of software products, which facilitate customers’ ability to manage a wide variety of business processes using open standards to interconnect applications, data and operating systems, revenues increased 4 percent. Revenues for Information Management software, which enables clients to leverage information on demand, increased 4 percent. Revenues from Tivoli software, infrastructure software that enables customers to centrally manage networks and storage, increased 3 percent, and revenues for Lotus software, which allows collaborating and messaging by customers in real- time communication and knowledge management, increased 2 percent. Revenues from Rational software, integrated tools to improve the processes of software development, decreased 2 percent compared with the year-ago quarter.
IBM expects to hold or gain market share for the fourth quarter in each of the five key middleware brands.
Global Financing revenues declined 8 percent (6 percent, adjusting for currency) in the fourth quarter to $605 million. Revenues from the Enterprise Investments/Other area, which includes industry-specific IT solutions such as product life-cycle management software, increased 5 percent (11 percent, adjusting for currency) to $383 million versus the prior-year fourth quarter.
The company’s total gross profit margin was 44.1 percent in the 2005 fourth quarter compared with 38.8 percent in the 2004 period, which includes the divested PC business. Excluding the PC business, the fourth-quarter 2004 gross profit margin was 41.9 percent.
Total expense and other income decreased 7 percent to $6.2 billion compared with the prior-year period, and decreased 11 percent without the current-period pension charge. SG&A expense of $5.3 billion decreased 3 percent year over year. Excluding the current-year pension charge, SG&A expense decreased 8 percent principally as a result of the sale of the PC business. RD&E expense was $1.5 billion, a decrease of 4 percent compared with the year-ago period. Intellectual property and custom development income decreased to $228 million compared with $298 million a year ago. Other (income) and expense was $334 million of income in the fourth quarter of 2005, versus $4 million of income in the same period last year. The year-over-year improvement includes $182 million of real estate gains, compared to the previous estimate of $75 million as set forth in the Company’s SEC Form 10-Q for the quarter ended September 30, 2005. The improvement also includes gains from foreign currency hedging transactions of approximately $150 million.
IBM’s effective tax rate in the fourth-quarter 2005 was 29.5 percent, compared with 29.8 percent in the fourth quarter of 2004. Excluding the one-time item, the fourth-quarter 2005 tax rate was 30.0 percent compared with 29.8 percent in the year-ago quarter.
Share repurchases totaled approximately $1.0 billion in the fourth quarter. The weighted-average number of diluted common shares outstanding in the fourth-quarter 2005 was 1.60 billion compared with 1.69 billion shares in the same period of 2004.
In the fourth quarter, IBM recorded a $36 million charge, net of tax, to reflect the cumulative effect of a change in accounting principle related to the adoption of FASB Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143.”