International Business Machines Corp. (
IBM
)
reported modest fourth quarter 2011 results with earnings per share
(
EPS
) surpassing the Zacks Consensus Estimate by 9 cents but revenues
falling shy of our expectation of $29.74 billion.
IBM posted non-GAAP EPS of $4.71 in the fourth quarter, up 10.8%
on a year-over-year basis and representing double-digit growth in
18 of the last 20 quarters. The significant upside was primarily
driven by solid revenue growth (7 cents), margin growth (13 cents)
and share repurchases (26 cents).
Revenue Details
Total revenue increased 1.6% year over year (1.0% adjusted for
currency) to $29.49 billion. The upside was driven by continued
strength across its growth markets, which accounted for 22.0%
of IBM's total geographic revenue in the fourth quarter. IBM's key
initiatives such as Business Analytics, Smarter Planet and Cloud
offerings also maintained the growth momentum in the fourth
quarter.
Revenues by Segment
Services
- Total Global Services revenue grew 2.7% year over year to $15.33
billion, driven by an upside of 2.8% (3.0% at constant currency) in
Global Technology Services revenues to $10.45 billion and 2.5%
(2.0% at constant currency) in Global Business Services revenues to
$4.88 billion.
The estimated services backlog, as of December 31, 2011, was
$141.0 billion, up $4.0 billion (flat at constant currency) from
the year-ago quarter.
Total transactional revenue jumped 3.0% to $6.2 billion. Total
outsourcing revenue stood at $7.2 billion, up 4.0% year over
year.
Software
- IBM reported a year-over-year increase of 11.0% (11.0% at
constant currency) in its branded key middleware products including
WebSphere, Information Management, Tivoli, Rational products and
Lotus products.
Accordingly, revenues from the company's Software segment grew
8.7% (9.0% at constant currency) year over year to $7.65
billion.
Operating systems revenue of $710.0 million, upped 3.0% year
over year (3.0% at constant currency). Revenues from the WebSphere
suite of software products shot up 21.0% year over year.
Information Management software revenues escalated 9.0%. Revenues
from Tivoli software rose 14.0%. Revenues from Lotus software
decreased 2.0%, while the same from Rational software crept up
4.0%.
Hardware
- Systems and Technology revenues decreased 8.0% (8.0% at constant
currency) year over year to $5.80 billion. Systems revenues fell
7.0% (7.0% at constant currency), primarily attributed to a 31.0%
decline in System z revenues. Total delivery of System z computing
power, as measured in MIPS (millions of instructions per second)
plunged 4.0% in the quarter.
Revenue from POWER Systems leaped 6.0% year over year while
revenues from System x mainframe server products decreased 2.0%.
Revenues from System Storage decreased 1.0% while revenues from
Retail Store Solutions increased 1.0% year over year. Revenues from
Microelectronics OEM plunged 11.0%.
Financing
- Revenues from Global Financing fell 12.7% (13.0% at constant
currency) year over year to $548.0 million.
Revenue by Region
From a geographic perspective, fourth quarter 2011 revenues were
up 3.0% (3.0% at constant currency) in the Americas while the same
in the Asia-Pacific region grew 2.0% (declined 1.0% at constant
currency). Europe, Middle East & Africa (EMEA) revenues inched
up 1.0% (1.0% at constant currency) during the quarter.
IBM witnessed a growth of 10.0% (11.0% at constant currency) in
the reported quarter from Brazil, Russia, India, China and South
Africa (BRICS), reflecting the company's strength in the emerging
countries. Revenues from the growth markets, which include South
Africa, Vietnam and the Czech Republic, increased 7.0% (8.0% at
constant currency).
Operating Performance
Gross profit on a non-GAAP basis increased 3.5% year over year
to $14.72 billion. Gross margin rose 90 basis points (bps) on a
year-over-year basis to 49.9%. The year-over-year growth in gross
margin was driven by strong margin expansion in services segment
and improvement in revenue mix.
Total operating expense & other income increased 2.4% year
over year to $7.45 billion in the quarter, primarily due to higher
acquisition costs and selling, general & administrative expense
(up 2.1% year over year).
Pre-tax income on a non-GAAP basis came in at $7.27 billion, up
4.6% year over year. Pre-tax margin increased 70 bps to 24.7% in
the quarter. Net profit on a non-GAAP basis improved 4.4% year over
year to $5.49 billion. Net margin increased 50 bps year over year
to 18.6%.
Balance Sheet
IBM ended the quarter with $11.92 billion in total cash and
marketable securities, compared with $11.30 billion in the previous
quarter.
At the end of the third quarter, total debt was $31.32 billion
compared with $30.36 billion in the prior quarter. Global Financing
debt totaled $23.3 billion versus $22.8 billion at the end of
December 2011, resulting in a debt-to-equity ratio of 7 to 1.
Non-global financing debt increased $600.0 million since
September 30, 2011 to $8.0 billion and resulted in a
debt-to-capitalization ratio of 32.0% compared with 27.8% at the
end of the third quarter.
The company reported cash flow from operations (excluding Global
Financing receivables) of $10.0 billion versus $4.47 billion in the
previous quarter. In the reported quarter, IBM generated free cash
flow of $9.0 billion, up from $3.5 million in the prior
quarter.
Guidance
IBM expects fiscal 2012 operating EPS of at least $14.85. GAAP
EPS is expected to be around $14.16. Currently, the Zacks Consensus
Estimate for fiscal 2012 is pegged at $14.81, which is slightly
below management's guided range.
Our Take
IBM's top-line grew a modest 2.0% in the reported quarter, which
primarily reflects a slowing IT spending environment, in our view.
Although software continued to grow strongly, sluggish growth in
the services segment and decline in hardware make us cautious on
the overall IT spending environment. We believe that macroeconomic
concerns will continue to hurt IBM's growth in the first half of
2012.
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.
Moreover, a strong patent portfolio and accretive acquisitions
will provide IBM a competitive edge over other prominent vendors,
including
Oracle Corp. (
ORCL
)
,
Hewlett-Packard Co. (
HPQ
)
,
Microsoft Corp (
MSFT
)
and
EMC Corp (
EMC
),
in our view.
We have a long-term (6-12 months) Neutral recommendation on IBM.
Currently, IBM has Zacks #3 Rank, which translates into a
short-term Hold rating.
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