International Business Machines Corp. (
surged 4.11% ($8.06) in after-hours trading on the heels of
strong fourth quarter earnings, which beat the Zacks Consensus
Estimate by 14 cents per share (2.7%).
After two consecutive misses, IBM's fourth quarter revenue of
$29.30 billion succeeded in beating the Zacks Consensus Estimate
of $29.18 billion. However, revenue declined 1% from the year-ago
quarter. Adjusting for favorable foreign currency, revenue growth
was almost flat on a year-over-year basis in the reported
quarter. Revenue jumped 18.4% on a sequential basis.
was the only segment that witnessed year-over-year growth in the
quarter. Revenue climbed 3.5% year over year (up 4% due to
favorable foreign currency) and 37.3% sequentially to $7.92
billion. Revenue from IBM's middleware products (WebSphere,
Information Management, Tivoli, Lotus and Rational products)
increased 5.0% year over year, while operating system revenue
remained flat on a year-over-year basis.
revenue decreased 2.1% year over year but increased 3.7%
sequentially to $15.00 billion. Global technology services
revenue fell 1.6% from the year-ago quarter but climbed 3.6% from
the third quarter to $10.28 billion. Global business services
revenue was $4.72 billion, down 3.2% from the year-ago quarter
but up 3.9% on a sequential basis. Backlog at the end of fourth
quarter remained flat at $140.0 billion.
Total outsourcing revenue decreased 3.0% year over year, while
transactional revenue also declined 1.0% year over year in the
quarter. GTS outsourcing declined 3% from the year-ago quarter,
while GBS outsourcing plunged 4.0% year over year in the reported
Total signings amounted to $17.9 billion during the quarter,
down 12.0% on a year-over-year basis. Outsourcing signings
plunged 28% year over year to $8.3 billion, while transactional
increased 9.0% from the year-ago quarter to $9.5 billion.
Outsourcing backlog declined 3% year over year to $89.0 billion
at the end of the last quarter.
Hardware/System & Technology
revenue declined a modest 1.0% year over year but surged 48.0%
quarter over quarter to $5.76 billion. Excluding the negative
impact from the divestiture of Retail Store Solutions ("RSS"),
revenue increased 4.0% from the comparable prior-year quarter.
Revenue in the growth markets soared 68% year over year in the
Systems revenue except RSS increased 4.0%, primarily due to a
56.0% year-over-year jump in System z revenues. This fully offset
weak performance from Power Systems, System X and Storage, which
were down 19%, 2% and 5%, respectively. Revenue from
Microelectronics OEM increased 4% year over year in the reported
IBM gained significant market share during the quarter,
primarily driven by 350 new contracts from customers previously
revenue declined 2.4% year over year but increased 13.3%
sequentially to $535.0 million in the reported quarter.
Region wise, revenue grew only in Asia-Pacific, up 4.0% (5.0%
including favorable currency) year-over-year to $7.0 billion.
Revenue from Americas ("US and Canada") was flat year over year
(up 1.0% including favorable currency) at $12.5 billion. Revenue
from Europe/Middle East/Africa declined 5.0% (down 3.0% including
favorable currency) from the year-ago quarter to $9.1
Revenue from IBM's growth markets increased 7.0%. IBM
continued to witness strong growth from BRIC (Brazil, Russia,
India & China) countries, which were up 11% year over year
(14% including favorable impact of foreign currency) in the
Gross profit on a non-GAAP basis increased 3.6% year over year
and 28.9% sequentially to $15.33 billion. However, gross margin
expanded 210 basis points ("bps") from the year-ago quarter and
420 bps from the previous quarter. The improvement in gross
margin was primarily driven by favorable revenue mix and
Total operating expense & other income decreased 2.3% from
the year-ago quarter but increased 13.2% sequentially to $7.22
billion. The year-over-year decline was primarily due to lower
selling, general & administrative expense (SG&A) (down
3.3% year over year). Sequentially, both SG&A and research
& development expense (R&D) increased in the reported
Higher gross margin base and lower-than-expected increase in
operating expenses drove pre-tax income, which jumped 9.5% year
over year and 47.0% from the previous quarter to $8.11 billion in
the fourth quarter. Pre-tax margin increased 250 bps from the
year-ago quarter and 540 bps sequentially to 27.7% in the
Net profit on a non-GAAP basis increased 9.5% year over year
and 47.5% sequentially to $6.13 billion in the reported quarter.
Earnings per share ("EPS") jumped 14.4% from the year-ago quarter
and 48.9% from the previous quarter to $5.39. Earnings growth was
driven by margin expansion (47 cents) and aggressive share
repurchase (24 cents), which fully offset weak revenue growth
(negative impact of 3 cents).
Balance Sheet & Cash Flow Details
IBM ended the quarter with $11.13 billion in total cash and
marketable securities, compared with $12.25 billion in the
previous quarter. At the end of the fourth quarter, total debt
was $33.27 billion compared with $33.67 billion in the prior
IBM reported cash flow from operations (excluding Global
Financing receivables) of $10.50 billion versus $4.19 billion in
the previous quarter. In the reported quarter, IBM generated free
cash flow of $9.52 billion, significantly up from $3.14 billion
in the prior quarter.
IBM forecasts fiscal 2013 operating earnings of at least
$16.70 per share, an estimated 9.5% increase from $15.25 reported
in 2012. IBM continues to expect effective tax-rate to be around
25% for 2013.
Although IBM reported a better-than-expected fourth quarter,
revenue growth was disappointing. We expect software to grow
strongly in the near term, although stiff competition from Oracle
remains a concern. However, sluggish growth in the services and
hardware segment makes us cautious on the stock.
Moreover, volatile macro-economic environment, continued
weakness in the domestic market and Euro zone, declining
outsourcing signings and increasing competition from other
outsourcing service providers such as
are the major headwinds in the near term.
Currently, IBM has a Zacks Rank #4 (Sell).
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