International Business Machines (IBM - Free IBM Stock Report), a global provider of mainframe computers, software, and services, and a component of the Dow 30, reported strong March-quarter earnings on flattish revenues. The stock of the technology-sector bellwether, which rose 2.3% on Tuesday, prior to the earnings announcement, lost all of that advance and a little more on Wednesday morning, reflecting investor disappointment regarding the company's revenue performance and overall stock market weakness.
The company earned $2.61 a share in the opening period of 2012, including $0.17 of acquisition and retirement-related expenses, up 13% from the $2.31 logged in the year-earlier term and slightly ahead of our estimate of $2.55.
But revenues of $24.7 billion increased a scant 0.3% year to year. Top-line growth was limited by a 6.7% decline in computer hardware revenue compared with a strong performance in the year-earlier quarter, when customer demand for System z servers introduced in late 2010 surged. Revenues from Power Systems and System x servers were flat, but management points out that the company continues to gain share in the UNIX systems market, and its Power systems replaced 250 of its competitors' systems in the period. It expects its new PureSystems integrated systems to contribute revenues in the second half. Due to the top-line weakness, Systems' margins contracted. Note that the company has agreed to sell its cash register business to Toshiba, but the product line only accounted for about 4% of systems revenue in the March quarter.
On a more positive note, software revenues rose 5% aided by growth in analytics, cloud computing, and IBM's Smarter Planet initiatives. Software has very wide margins, and along with companywide productivity measures, contributed to the improvement in IBM's gross and operating margins in the quarter.
Meanwhile, technology services revenue increased 2%, supported by strong momentum in rapidly growing nations. Further, margins expanded, reflecting productivity measures, high margins in developing nations, and better management of lower-margined contracts. On the other hand, business services revenue fell 2%, weighed down by weakness in Japan and in sales to public-sector customers. Two large contracts in Japan reduced business services profits by $60 million. The services backlog fell 2%, to $139 billion, in spite of a 12% increase in services signings.
March-period results were helped by a lower tax rate, due to a one-time Latin American-related tax benefit, and share repurchases, which more than offset the costs of a workforce rebalancing program.
Looking ahead, IBM now expects to earn at least $14.27 a share in 2011, including $0.73 of acquisitions and retirement costs, up from its previous guidance of $14.16. We have increased our 2011 share-net estimate for the company by a dime, to $14.30, and our 2013 estimate by $0.75, to $15.75. Although slower information technology spending by companies is a concern, IBM's earnings next year should benefit more substantially from its efforts to improve its product mix and from the continued expansion in rapidly growing areas, like analytics, and in parts of the world that are growing faster than the Americas and Europe.
Although the steady improvement in IBM's stock price since late 2008 discounts a portion of the issue's 3- to 5-year appreciation potential, and despite the current concerns regarding slower near-term information technology spending by companies, the blue chip stock is a solid selection for conservative, long-term investors. IBM's earnings prospects to mid-decade are better-defined than most technology providers'. The company is financially strong. And the shares aren't very volatile, as indicated by the low Beta and high Price Stability rating.
About The Company:International Business Machines is a worldwide supplier of advanced information processing technology, communication systems, services, and program products. 2010 revenues can be broken down as follows: Global Technology Services, 39%; Global Business Services, 19%; Systems and Technology, 17%; Software, 22%; Global Financing, 2%; Other, 1%. Foreign business accounted for 64% of 2010 revenues.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.