International Business Machines (IBM - Free IBM Stock Report), a global provider of mainframe computers, software, and services, and a component of the Dow 30, staged a strong earnings performance in the June quarter in spite of disappointing revenues. The stock rose more than 3% in early Thursday morning trading.
The company reported earnings of $3.34 a share for the period, including $0.17 of acquisitions and retirement expenses, slightly ahead of our estimate of $3.30 and up 11% from the $3.00 logged in the year-earlier quarter. The good share-net performance was supported by margin expansion and stock repurchases.
On the other hand, reported revenues slipped 3% and were up only 1% on a constant currency basis. The company entered the quarter with a significant currency headwind, and the systems and technology segment faced a tough comparison with the year-earlier period, which continued to benefit from a product rollout in late 2010. Revenues in IBM's major market nations fell 1% in the June interim, reflecting sluggish economic activity, while growth markets reported an 8% revenue increase, with business in China up 20%. Looking at the business segments on a constant currency basis, combined services revenues were relatively flat; software revenues rose 4%; and systems and technology revenues declined 7%.
But wider gross margins helped offset the top-line weakness. Margins in both the technology services and business services segments expanded, and the software arm, which has very wide margins, accounted for a relatively larger portion of revenues. Total expenses also included about $85 million of gains from hedging currencies compared to losses of about $195 million in the 2011 June interim. Too, IBM repurchased about $3 billion of stock in the quarter, which enhanced share net. In all, lower revenues clipped a dime from the year-to-year share-net comparison in the June quarter, but this was more than offset by margin expansion (a positive $0.35 a share) and stock repurchases ($0.17).
The company now expects to earn about $14.40 a share in 2012, including $0.70 of acquisitions and retirement costs, up 10% from the $13.06 reported for 2011, and in line with our 2012 estimate. We continue to look for share net to reach the $15.80-$16.00 range in 2013.
Ongoing efforts to address lower-margined contracts may have a modestly negative impact on technology services revenues, but should support further margin improvement for the business. IBM has also been shifting more resources in its business services division to high-margined areas, like analytics.
IBM's other divisions should also do fairly well over the next several quarters. To capture greater share in growth markets, IBM's software branch is hiring 200 to 300 sales representatives a month through the end of 2012. The hardware business (systems and technology segment) appears to be gaining share in Power systems and expects volume shipments of its new PureFlex integrated systems to lift revenues in the December quarter of this year and, we expect, in 2013.
In sum, although the stock's strength discounts much of its 3- to 5-year potential, we still view IBM shares as a core holding for conservative investors. The company has been a consistent generator of higher earnings and healthy cash flow over the past decade, and is financially strong, with debt not related to financing customer purchases accounting for only 24% of total capital.
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.