Editor’s note: IBM improved profits in 2012 even though overall revenues slipped, the company said Tuesday. Technology Business Research takes an inside look at Big Blue’s earnings and prospects for 2013.

HAMPTON, N.H. – Successful execution on core initiatives such as Smarter Planet enabled IBM (NYSE: IBM) to mitigate revenue losses and improve profitability during 4Q12 and the full year.

IBM’s 4Q12 and full-year 2012 financial performance indicates that, despite CEO succession, the company successfully navigated disruptions to the global economy and IT landscape by executing on core initiatives including Growth Markets and Smarter Planet to capitalize on high-demand, higher-margin technology and geography areas.

Reported full-year revenue dipped 2% from 2011 to $104.5 billion, but SG&A cost controls coupled with a focus on shifting the revenue base toward more profitable software, services and integrated solutions enabled reported gross, pre-tax and net margin expansion for both 4Q12 and the full year.

The refreshed System z portfolio spurred a mainframe ramp and customers continued adopting PureSystems offerings, helping to drive year-to-year and sequential improvements to Systems and Technology Group (STG) gross and pre-tax margins, as well as sequential revenue improvements across the server and storage product lines. Furthermore, they position IBM for continued improvements to hardware performance in 1H13.

Successful Evolution

IBM’s ability to evolve its mainframe portfolio and value proposition in tandem with customer business pain points is enabling continued market leadership .

TBR believes IBM is leveraging its 2H12 Power and System z portfolio refreshes to capitalize on HP and Oracle’s lateness to market with new proprietary servers and legal battles, and maintain its status as the incumbent leader; driving a reported 8% sequential expansion to Power systems revenue and 56% YTY expansion to System z revenue during 4Q12. IBM has been able to maintain mainframe momentum through the years by continually reinventing the system’s value proposition.

Currently, it is positioning System z as an optimized tool to address key business requirements in cloud, big data, and security. Specialty engines accounted for more than half of the System z MIPS IBM shipped during the quarter, indicating the vendor’s vertical-centric model is experiencing success in growing and mature markets alike. As mainframes traditionally handle customers’ most business critical workloads and processes, TBR believes IBM’s affinity for maintaining long-term service and support relationships will play an ever more critical role in retaining customers and gaining share in this market during 2013. This strategy coupled with more updates to the Power portfolio during 1H13 will keep proprietary demand strong for IBM in quarters to come.

Leveraging Its Channel

IBM will reduce price points, drive a market message of needs-based solutions and leverage the channel to grow its converged infrastructure install base.

TBR believes IBM slashed PureFlex prices and reduced PureApplication configurations to generate downstream momentum and build its converged infrastructure install base in 2012, reporting more than 2,300 PureSystems sold in 70 countries during the year. As IBM keeps these lower prices and continues investing in innovation around these platforms, it will face some revenue and profit pressures during 2013. In an increasingly competitive and strategic converged infrastructure market, TBR believes IBM will focus on driving a tailored message of value and optimization focusing on customer pain points to increase its foothold.

As supported by reduced prices and new configurations, TBR believes IBM is working proactively to adjust its converged infrastructure strategy and not leave the door open for competitors to establish stronger footholds earlier in the space, particularly in the low end. In November, IBM announced enhancements to PureSystems offerings that target increased utilization and reduced operational costs; thus positioning for a stronger value-add by reducing the solution total cost of ownership. Additionally, in January IBM expanded partnerships with distributors Ingram Micro and Tech Data as an important tool in accessing new customer bases, including the midmarket, ISVs and MSPs, and growing its install base.

As distributors also add solutions such as VSPEX from IBM competitors to their linecards, TBR believes differentiating with services, support and financing capabilities will be important to IBM in solidifying relationships with partners.

(Editor’s note: Krista Macomber is an analyst with Technology Business Research.)