International Business Machines Corp. (
plunged 4.30% ($8.90) in after hours trading on the heels of
dismal first-quarter earnings of $3.00 per share, which missed
the Zacks Consensus Estimate by 6 cents per share (2.0%).
IBM's first-quarter revenues of $23.41 billion missed the Zacks
Consensus Estimate of $24.59 billion. Revenues declined 5.1% from
the year-ago quarter and 20.1% on a sequential basis. Unfavorable
foreign currency movement, particularly in yen, had a negative
impact of 2.0% on first-quarter revenues.
None of the major segments achieved growth in the quarter.
Software declined a modest 0.5% year over year but a huge 29.6%
quarter over quarter to $5.57 billion (up 1% on a constant
IBM achieved growth in some of the key areas that include smarter
commerce, social business, security and storage management.
However, IBM's inability to close certain software transaction
(worth approximately $400.0 million) fully offset this strong
growth in the reported quarter.
Revenues from IBM's middleware products [WebSphere, Information
Management, Tivoli, social workforce solutions (prior Lotus) and
Rational products] increased 1.0% year over year (up 2.0% on a
constant currency basis) to $3.5 billion. Operating system
revenues declined 2.0% on a year-over-year basis to $578.0
Services revenues decreased 4.0% year over year and 6.1%
sequentially to $14.08 billion. Global technology services
revenues fell 4.3% from the year-ago quarter and 6.6% from the
fourth quarter of 2012 to $9.61 billion. Global business services
revenues were $4.48 billion, down 3.3% from the year-ago quarter
and 5.0% on a sequential basis.
Backlog at the end of the first quarter increased 1.0% year over
year to $141.0 billion (up 5% on a constant currency basis). IBM
won 22 service agreements worth more than $100.0 million in the
Total outsourcing revenue decreased 5.0% year over year, while
transactional revenues declined 3.0% year over year in the
quarter. GTS outsourcing declined 6% from the year-ago quarter,
while GBS outsourcing decreased a modest 1.0% year over year in
the reported quarter.
Total signings amounted to $16.9 billion during the quarter, up
44.0% on a year-over-year basis. Outsourcing signings surged 97%
year over year to $10.7 billion, while transactional decreased
2.0% from the year-ago quarter to $6.2 billion. Outsourcing
backlog remained flat on a year-over-year basis to $91.0 billion
at the end of the last quarter.
Hardware/System & Technology revenues (including effect
retail store solutions divestiture) plunged 17.2% year over year
and 46.1% quarter over quarter to $3.11 billion. Revenue growth
was negatively impacted by product transitions and lack of
Systems revenues decreased 13.0% from the year-ago quarter.
System z revenues increased 7.0% year over year, which was fully
offset by weak performances from Power Systems, System X and
Storage, which were down 32.0%, 9.0% and 11.0%, respectively.
Revenues from Microelectronics OEM decreased 16.0% year over year
in the reported quarter.
Global Financing revenues increased 1.8% year over year but
decreased 6.7% sequentially to $499.0 million in the reported
Region wise, revenues declined 7.0% year over year (down 1.0% on
a constant currency basis) to $5.7 billion in Asia-Pacific.
Revenues from Americas declined 4.0% year over year (down 3.0% on
a constant currency basis) to $10.0 billion. Revenues from
Europe/Middle East/Africa declined 4.0% (down 4.0% on a constant
currency basis) from the year-ago quarter to $7.3 billion.
Revenues from IBM's growth markets decreased 1.0% from the
year-ago quarter. IBM revenues from BRIC (Brazil, Russia, India
& China) countries declined 1.0% year over year (up 3% on a
constant currency) in the reported quarter. Revenues from major
markets declined 6.0% year over year in the reported quarter.
Gross margin expanded 100 basis points ("bps") from the year-ago
quarter. The improvement in gross margin was primarily driven by
favorable revenue mix and productivity improvements. However, on
a sequential basis gross margin contracted 560 bps due to lower
Total operating expense & other income decreased 4.4% from
the year-ago quarter and 5.0% sequentially to $6.85 billion. The
decline was primarily due to lower selling, general &
administrative expense (down 6.7% year over year and 7.2%
sequentially). This was partially offset by a higher research
& development expense (up 1.4% year over year and 2.6%
Higher gross margin base and lower-than-expected increase in
operating expenses drove pre-tax income as a percentage of sales,
which jumped 70 bps on a year-over-year basis in the quarter.
In the reported quarter, net income was $3.38 billion or 14.4% of
sales compared with $3.27 billion or 13.2% in the year-ago
quarter and $6.13 billion or 20.9% in the previous quarter.
Earnings jumped 7.9% from the year-ago quarter driven by margin
expansion (23 cents) and aggressive share repurchase (13 cents),
which fully offset weak revenue growth (negative impact of 14
cents). On a sequential basis, earnings plunged 44.3% primarily
due to lower revenues.
Balance Sheet & Cash Flow Details
IBM ended the quarter with $11.99 billion in total cash and
marketable securities, compared with $11.13 billion in the
previous quarter. At the end of the first quarter, total debt was
$33.40 billion compared with $33.27 billion in the prior quarter.
IBM reported cash flow from operations (excluding Global
Financing receivables) of $2.43 billion versus $2.87 billion in
the year-ago quarter. In the reported quarter, IBM generated free
cash flow of $1.70 billion, significantly down from $1.87 billion
in the year-ago quarter.
IBM paid dividends worth $950.0 million and bought back 12.3
million shares in the quarter for $3.5 billion. At the end of Mar
31, 2013, IBM had $6.2 billion remaining under its share buyback
IBM forecasts fiscal 2013 operating earnings of at least $16.70
per share, an estimated 9.5% increase from $15.25 reported in
2012. Tax rate is expected to be approximately 25% for the next
IBM expects to report a strong second quarter from the rollover
of the pending mainframe and software deals. The company expects
growing contributions from smarter planet (up 25% year over year
in the last quarter), business analytics (up 7% year over year in
the last quarter) and SaaS & Mobile (up more than 50% year
over year in the last quarter) to drive top-line growth going
IBM expects second-quarter operating earnings growth to be
similar that of the first quarter. However, workforce rebalancing
activity in the second quarter is expected to have a negative
impact on earnings.
Although IBM reported a dismal first quarter, we believe strong
backlog, improving outsourcing signings and new contract wins
will boost the top line going forward. However, sluggish IT
spending and continuing weaknesses in the domestic market and
Euro zone are the major concerns in the near term.
Additionally, deteriorating results in the hardware segment
remain a major concern going forward. IBM continues to expand its
Power systems into the Linux market. IBM is also focusing on
further developing its flash technology and storage business. We
believe that these improvements will boost hardware top-line
growth going forward.
Moreover, this will also help it to counter strong competition
EMC Corp. (
Currently, IBM has a Zacks Rank #3 (Hold).
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