IBM beats recession?

July 17, 2009
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Data-center-iStock_000001759899XSmall IBM (IBM) released its quarterly results yesterday. They easily beat earnings estimates and raised their full-year earnings guidance. Revenue was down but margins improved significantly. Business headlines are very favorable extolling the results. 

IBM’s results should solidify its stock and overall tech leadership in the market. But before getting too excited about press praise we should look at the results.
  • Revenue of $23.3 billion, down 13 percent, or 7 percent adjusting for currency
  • Net income of $3.1 billion, up 12 percent; net margin of 13.3 percent, up 3.0 points
  • Free cash flow of $3.4 billion; cash balance of $12.5 billion
  • Pre-tax income margin of 18.3 percent, up 4.1 points; largest increase in more than 3 years
  • Gross profit margin of 45.5 percent, up 2.3 points; up 19 of last 20 quarters
  • Total expense & other income -19% with SG&A expense -19& & RD&E expense -14%

A breakdown by business line:

  • Global Services sales -12% to $13.4 billion, pre-tax margin +4.1 points; income +23%, 17 deals $100+ million
  • Software sales -7% to $5.2 billion (flat adjusted for currency), pre-tax margin +8.3 points; income +24%
  • Hardware sales -26% to $3.9 billion

Of special note to

Data-center-iStock_000001759899XSmall IBM (IBM) released their quarterly results yesterday. They easily beat earnings estimates and raised their full-year earnings guidance. Revenue was down but margins improved significantly. Business headlines are very favorable extolling the results. 

IBM’s results should solidify its stock and overall tech leadership in the market. But before getting too excited about press praise we should look at the results.
  • Revenue of $23.3 billion, down 13 percent, or 7 percent adjusting for currency
  • Net income of $3.1 billion, up 12 percent; net margin of 13.3 percent, up 3.0 points
  • Free cash flow of $3.4 billion; cash balance of $12.5 billion
  • Pre-tax income margin of 18.3 percent, up 4.1 points; largest increase in more than 3 years
  • Gross profit margin of 45.5 percent, up 2.3 points; up 19 of last 20 quarters
  • Total expense & other income -19% with SG&A expense -19& & RD&E expense -14%

A breakdown by business line:

  • Global Services sales -12% to $13.4 billion, pre-tax margin +4.1 points; income +23%, 17 deals $100+ million
  • Software sales -7% to $5.2 billion (flat adjusted for currency), pre-tax margin +8.3 points; income +24%
  • Hardware sales -26% to $3.9 billion

Of special note to those involved in BI, data integration and data warehousing, the WebSphere family of software products gained 8%.

Are we there yet (at the bottom or starting to rise?)

IBM continues to build its cash balance, which is one of the reasons why tech has been attractive in this credit-driven recession. It has a significant ‘annuity’ business with software maintenance fees, outsourcing, services and mainframe software feeding the free cash flow and stabilizing the overall results in a recession.

IBM revenue declined, however, across its major business segments and geographies. IBM, along with its tech peers, has stated that corporate IT spending remains sluggish but may have stabilized. Only in a recession would these top-line results be overlooked and results hailed as “strong,” “blockbuster” or “a walk-off  home-run” (this one only baseball fans will know that this is nirvana). Stock performance is based on market perceptions; relative performance of prior periods, peers and other industries; and meeting (or managing) expectations.

Although revenue declines have slowed we have not yet seen the point where revenues have started to actually increase. Software and services should be the early breakout categories where signs of recovery are evident and IBM is well positioned to ride the early recovery cycle rise.

Giving Caesar his due

Beyond the quarterly results, IBM deserves the key praise for being among the best in the industry. Their decisions, both strategically and tactically, are what have allowed them to continue to grow, prosper and beat industry pundits’ claims since the ‘death of the mainframe’ in the early 1990s that IBM was tech backwater.

IBM’s current business model is raising margins and earnings, not only because of current cost cutting and expense management, but because of strategic business decisions since the alleged ‘death of the mainframe.’ IBM since the early 1990s has transformed itself from a mainframe and hardware company to a firm driven by software and services. It has made many acquisitions, big and small, over the last 15 years to build up its software and services businesses but, just as important, it has divested itself of its consumer PC and printer businesses along with other low margin hardware. These strategic decisions have created a business model where this recession and its impact on the consumer is not impacting it as in past recessions.

We still have not seen the upswing yet but tech companies such as IBM are certainly better positioned than many other industries for riding out this recession and leveraging the early cycle rise out of the recession that will come…eventually.

Disclosure: The analyst and his family do not have current stock positions in IBM.


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