International Business Machines (IBM – Free IBM Stock Report), a Dow-30 component and global computer hardware, software, and services provider, has turned in another quarter of higher earnings on lower revenues in the June period. The stock pulled back modestly in morning trading.
The company reported June-quarter earnings of $4.12 a share after $0.20 of acquisition and retirement expenses. Results were a bit higher than our estimate of $4.05 and well above the $2.91 logged in the year-earlier period, which included $0.65 of workforce rebalancing costs. Excluding the latter charge, earnings advanced nearly 16% in the quarter. Reductions in selling and research expenses, a slightly lower tax rate, and stock repurchases supported the earnings advance.
Of more concern, however, was the 2% decline in IBM's revenues, 1% adjusted for currency and the divestiture of its customer care business. Although the falloff was less than the 4% dip in the March term, the June period was the ninth-consecutive quarter in which the company's revenues failed to top the year-earlier level.
Revenues in the Americas region rose 1% year over year on a constant-currency basis, but declined 3% in the Europe/MiddleEastern/Africa region and 6% in Asia/Pacific. Revenues in developing nation markets fell 4%.
By product group, services revenues rose 1% adjusted for the divestiture. Technology services benefited from the growth in cloud computing and large contracts signed in 2013. In business services, weakness in enterprise offerings more than offset growth in products that address the digital front office. The 1% decline in IBM's services backlog is a concern, however, since services account for over half of consolidated revenues. Meanwhile, software turned in a flat performance in spite of a 3% rise in middleware revenues, and software margins, though wide, were unchanged.
IBM's systems business was its weakest link in the quarter, with revenues down 12%, although this represented an improvement from the 23% decline posted in the opening period of 2014, and systems margins contracted. Power systems revenues plunged 29%. The company is taking actions to turn the Power systems business around. It launched entry-level POWER8 in June and plans to introduce mid-range and high-end models later this year.
Although the planned divestiture of IBM's Systems x line probably will hurt revenues further, we expect management's focus on improving margins and continued stock-repurchase activity to support earnings per share of $17.00 in 2014, excluding an estimated $1.00 of acquisition and retirement costs (up slightly from our previous call of $16.85). Our 2015 forecast is for share net of $18.50.
Meanwhile, IBM has been taking steps to transform itself into a more profitable entity. It has launched a number of initiatives in rapidly growing areas, like cloud computing; announced investments in strategic areas, like next-generation chip technology; recently inked an agreement with tech staple Apple to provide mobility products to enterprise customers; and plans to divest nonstrategic lines like its industry-standard server business. The company is also a leader in the rapidly growing analytics field and is positioned to benefit from an eventual pickup in economic activity in emerging markets. These factors should pay off in higher revenues eventually and mid- to upper-single-digit share-net growth to late decade. The stock has good 3- to 5-year total return potential and its recent pullback may provide a good entry point. But investors in the shares will need to be very patient.
About The Company:International Business Machines is a worldwide supplier of advanced information processing technology, communication systems, services, and program products. Revenues in 2013 can be broken down as follows: Global Technology Services, 37%; Global Business Services, 18%; Systems and Technology, 14%; Software, 27%; Global Financing, 4%. Foreign business accounted for 65% of 2013 revenues.