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Dow-30 Earnings: International Business Machines - Third Quarter 2012
International Business Machines (IBM - Free IBM Stock Report), a worldwide provider of mainframe computers, software, and services, and a Dow-30 component, said its earnings per share in the September quarter rose 4%, on a 5% revenue decline.
The company reported September-interim earnings of $3.33 a share compared with $3.19 in the year-earlier quarter and our estimate of $3.45. Results included a number of unusual items: $0.11 a share of U.K. pension-related charges and $0.24 of workforce rebalancing charges, partly offset by a $0.23-a-share gain on the sale of the retail point-of-sale equipment business. Absent these items, reported results would have matched our estimate.
Revenues fell in each of the company's three business lines. Currency fluctuations accounted for 3% of the top-line decline. IBM's recent sale of its retail point-of-sale equipment (retail solutions) business accounted for another 1% of the revenue shortfall. Nonetheless, the top-line performance was clearly disappointing, and this is reflected in the stock’s poor showing so far today. All told...
Software revenue slipped 1%, hurt by currency fluctuations and weakness in North America late in the quarter. Services revenues fell 5%. Systems and technology (computer hardware) revenue declined 13%, or 11% adjusted for the sale of the retail store solutions business. Companies apparently are holding off on purchasing new mainframe computers in the tough economic climate. They may also have delayed purchases in anticipation of the rollout of new models of IBM's System z and Power servers.
As in the June quarter, however, IBM offset the revenue weakness with better margins, supported by productivity initiatives and a richer product mix, with very profitable software accounting for about a quarter of revenues. The company also continued to buy back stock, which further enhanced share net.
Looking ahead, the tough business environment probably will continue to restrain near-term revenue growth, although the computer hardware segment should benefit as the company ramps up shipments of the new System z mainframe computer and Power servers in the December quarter. But we expect margins to stay fairly wide. Owing to the $0.11-a-share U.K. pension charge, management has lowered its full-year 2012 earnings expectation to $14.29 a share, from $14.40. We are somewhat cautious, given the top-line weakness in the September interim, and have reduced our 2012 estimate to $14.20 a share. We have also trimmed our 2013 share-net call by $0.30, to $15.50.
Despite the mixed near-term prospects, growth in IBM's newer services and software solutions offerings, including cloud computing and business analytics, and in emerging markets, should support renewed top-line growth and enable earnings to approach the company's target of $20.00 a share by mid-decade. The stock is still a solid selection for conservative, patient investors, who may want to take advantage of the issue's aforementioned post-report weakness as a good entry point.
About The Company: International Business Machines is a worldwide supplier of advanced information processing technology, communication systems, services, and program products. 2011 revenues can be broken down as follows: Global Technology Services, 38%; Global Business Services, 18%; Systems and Technology, 18%; Software, 23%; Global Financing, 2%; Other, 1%. Foreign business accounted for 65% of 2011 revenues.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.