The fourth quarter of 1995 is looking very like the high water mark of Louis Gerstner’s tenure at IBM Corp, and the company was determined to blow the bears away in style. Net earnings per share of $3.66 before exceptional charges outran even the most optimistic forecasts – the consensus average had been for $3.45 a share, but while the mainframe shipments boom had been expected, the secret ingredient lay in what in accounting terms is one of the slipperiest of IBM’s businesses – services. Services were up a whopping 25% in the fourth quarter at $4,100m – actually a slowdown compared with earlier 1995 quarters, but the problem with that assessing turnover and profit in the services business is like deciding how long is a piece of string. If IBM lands a seven-year $500m facilities management contract that involves buying equipment and some programming in the first 18 months, and that cost an effort amounts to 40% of the value of the contract, IBM books that 40% of revenue and profit in that first 18 months, which leaves little or nothing for anything that may go wrong in the shape of programming delays and so forth in subsequent years. And in its present form the IBM services business is simply too young for any but a handful of the very first contracts to begun casting doubt on the accounting assumptions. Elsewhere, overall gross margin is still not quite up at the Intel Corp level, but IBM did manage a gain of more than a point to an enviable 41.9%. Overall profit before charges was $2,000m before a charge of $663m, partially offset by a one-time gain of $175m related to the 1994 sale of the Federal Systems Co to Loral Corp. Fourth-quarter 1995 earnings, after the two special items, were $1,700m or $3.09 per share. Fourth quarter sales of hardware rose by 7.9% to $11,500m, software revenues rose 9.0% to $3,600m – all those new CMOS mainframes and to a lesser extent place-holding AS/400s going out and attracting new software licences. Overall fourth quarter turnover rose 10% to $21,900m. IBM is at last out of the 60s – billions of turnover, that is – with turnover for the year up 12% at $71,900m. For all 1995, hardware revenues grew 10% to $35,600m, services revenues in 1995 soared 31% to $12,700m, overtaking software to become the second largest business segment. Software revenues grew 12% to $12,600m. Gross margins for the full year were 42.3% against 39.9% in 1994.

Strategies are working

North American business rose 11% in the quarter to $8,600m; for Europe/Middle East/Africa, sales were up 7% at $8,100m, Asia-Pacific business jumped 19% to $4,100m but Latin America slipped 3% to $1,100m. Currency had a 2% favourable effect on turnover in the fourth quarter compared with the year-ago period. Louis Gerstner has lost most of his must try harder caution and crowed that the breadth of our product and geographic portfolio once again paid off, adding that hardware rebounded from the product shortfalls of the third quarter, personal computers and servers were strong with 80% more System/390 MIPS shipped than in the year-ago period. Lotus Notes added 1.2m individual Notes users in the quarter. Most important, our quarterly and full-year results indicate that our fundamental strategies are working, Gerstner asserted. AS/400 revenues, as expected, declined against last year.