International Business Machines Corp. (
reported sluggish third quarter 2012 results. Although earnings of
$3.62 per share were in line with the Zacks Consensus Estimate,
revenue of $24.75 billion missed the consensus mark.
Total revenue declined 5.4% year over year to $24.75 billion.
Unfavorable foreign currency impact was approximately $1.0 billion
and the divestiture of the retail store solutions ("RSS")
point-of-sale business to Toshiba negatively impacted revenue by
Revenue decline was witnessed across all the operating segments.
Services, Software, System & Technology ("Hardware") and global
financing declined 4.6%, 0.9%, 13.1% and 9.2% respectively.
Region wise, revenue contribution from Americas ("US and
Canada") and Europe declined 4.0% and 9.0%, respectively in the
third quarter. Asia continues to remain the bright spot, with
revenue increasing 1.0% from the year-ago quarter. Japan revenue
stabilized in the quarter, as per management's earlier
IBM continued to witness strong growth from BRIC (Brazil,
Russia, India & China) countries, which were up 4% year over
year in the reported quarter. Strong performance from China, India
and Russia, which jumped 19%, 13% and 11% respectively, fully
offset a 3% decline in Brazil.
Although growth markets declined 1.0% in the quarter, 35
countries grew at a double-digit rate, reflecting strong ongoing
growth momentum in the region. However, major markets continued to
disappoint with revenue down 6.0% from the year-ago quarter.
Gross profit on a non-GAAP basis decreased 2.9% year over year
to $11.89 billion. However, gross margin expanded 130 basis points
("bps") annually to 48.1%. The year-over-year growth in gross
margin was driven by favorable revenue mix and productivity
Total operating expense & other income decreased 9.9% from
the year-ago quarter to $6.37 billion, due to lower research &
development expense (down 1.8% year over year) and higher other
income ($611.0 million versus $111.0 million in the year-ago
Lower operating expenses drove pre-tax income, which jumped 6.6%
year over year to $5.52 billion in the third quarter. Pre-tax
margin increased 250 bps to 22.3% in the reported quarter.
Net profit on a non-GAAP basis was $4.16 billion or $3.62 per
share compared with $3.95 billion or $3.28 in the year-ago quarter.
The earnings growth was driven by margin expansion (34 cents) and
aggressive share repurchase (17 cents), which fully offset weak
revenue growth (negative impact of 17 cents).
Operating Segment Details
- In the reported quarter, Global Technology Services ("GTS")
revenue decreased 3.9% year over year to $9.92 billion. Global
Business Services ("GBS") revenue declined 6.0% year over year to
$4.54 billion. The decline in services results was primarily due to
lower volumes across all the regions.
Total outsourcing revenue decreased 5.0% year over year, while
transactional revenue also declined 4.0% year over year in the
quarter. GTS outsourcing declined 5% from the year-ago quarter,
while GBS outsourcing plunged 7.0% year over year in the reported
Total signings amounted to $13.3 billion during the quarter, up
8.0% on a year-over-year basis. Outsourcing signings improved 26%
year over year to $7.3 billion, while transactional declined 8.0%
from the year-ago quarter to $6.0 billion.
The estimated services backlog, as of September 30, 2012,
increased 1% year over year to $138.0 billion. Outsourcing backlog
declined 1% year over year to $89.0 billion at the end of the third
- Software segment declined 1.0% year over year to $5.76 billion.
IBM reported 2% year over year revenue decline in its branded key
middleware products including WebSphere, Information Management,
Tivoli, Rational products and Lotus products.
Systems and Technology (Hardware)
- Revenue plunged 13.1% year over year to $3.90 billion. Systems
revenues fell 8.0%, primarily due to a 20.0% decline in System z
revenues. Total delivery of System z computing power, as measured
in MIPS (millions of instructions per second), plunged 2.0% in the
Revenue from POWER Systems decreased 1.0% on a year-over-year
basis. IBM gained significant market share during the quarter,
primarily driven by 260 new contracts from customers previously
System x mainframe server product revenue declined 5.0% year
over year in the quarter. Revenues from hardware storage decreased
10.0% due to continuing shift to software storage in the quarter.
Revenues from Microelectronics OEM also plunged 25.0% annually.
- Revenues from Global Financing decreased 9.2% year over year to
$472.0 million in the reported quarter.
Balance Sheet & Cash Flow Details
IBM ended the quarter with $12.25 billion in total cash and
marketable securities, compared with $11.19 billion in the previous
quarter. At the end of the third quarter, total debt was $33.67
billion compared with $32.25 billion in the prior quarter.
Global Financing debt totaled $23.3 billion versus $22.6 billion
at the end of June 2012, resulting in a debt-to-equity ratio of 7
to 1. Non-global financing debt increased $2.3 billion since
December, 2011 to $10.3 billion and resulted in a
debt-to-capitalization ratio of 36.0%.
IBM reported cash flow from operations (excluding Global
Financing receivables) of $4.19 billion versus $4.94 billion in the
previous quarter. In the reported quarter, IBM generated free cash
flow of $3.14 billion, down slightly from $3.66 billion in the
IBM continues to expect fiscal 2012 operating earnings of at
least $15.10 per share.
IBM's top-line decline in the last two quarters primarily
reflects slowing IT spending environment, in our view. Although
software is expected to continue to grow strongly, sluggish growth
in the services segment and decline in hardware make us cautious on
the stock. Moreover, unfavorable foreign currency, increasing
competition and stiff year-over-year comparisons in the hardware
segment may hurt profitability in the near term.
We believe that IBM remains well positioned for long-term growth
based on its four key growth initiatives: smarter planet, growth
markets, business analytics and cloud computing, which are expected
to deliver at least $50 billion in revenues by fiscal 2015. We
believe that IBM's strong product pipeline, expansion into emerging
markets and continuous acquisitions will help it to achieve this
target going forward.
We have a long-term (6-12 months) Neutral recommendation on IBM.
Currently, IBM has a Zacks #3 Rank, which translates into a
short-term Hold rating.
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