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Dow-30 Earnings: International Business Machines – Second Quarter 2013
International Business Machines (IBM – Free IBM Stock Report), a worldwide supplier of mainframe computers, software, and services, and a component of the Dow 30, turned in a slightly better-than-expected earnings performance in the June quarter, but lowered its outlook for reported earnings in 2013. The stock, however, responded favorably (rising about 2% in mid-morning trading) to the company's operating progress in the quarter and to management's assurances that it is still on track to achieve operating earnings of at least $20 a share in 2015 (we figure about $18 on a reported basis).
The company announced reported earnings of $2.91 a share for the June interim, up a bit from our estimate of $2.85, but down 13% from the $3.34 logged in the comparable period of 2012. Reported share net included $0.31 of acquisition charges and retirement-related items, and $0.69 of workforce rebalancing charges.
Revenues of $24.9 billion declined only 1% on a currency-adjusted basis, a little better than the 3% decline in the March period. The quarter included some software and mainframe deals that had failed to close in the March period. Software revenues rose 5% adjusted for currency, led by a 10% increase in its key branded middleware. Services slipped 1%, but ended the quarter with a backlog that was 7% larger than in the year-earlier period. Computer systems revenues, now only 15% of the June-period total, declined 7%, adjusted for both currency and the divestiture of its retail store systems business. IBM's System z mainframe revenues advanced 11%, while the declines in Power Systems and information storage systems moderated. Revenues in developed nations slipped 1% and rose only 1% in emerging nations. Meanwhile the gross margin expanded nearly 150 basis points, reflecting improvement in the services business.
Looking ahead, management raised its forecast for full-year 2013 operating earnings, before the above charges, by $0.20 a share. However, it had expected to offset the workforce rebalancing charge with a gain on a divestiture (possibly of its x86 server business) in the second half. That transaction now doesn't appear likely to take place, at least before the end of 2013. As a result, IBM is taking down its full-year reported earnings forecast, from its previous outlook of $15.53 a share, to $15.08, including $0.51 of acquisition charges, $0.66 of retirement expenses, and $0.65 of workforce rebalancing costs. The workforce rebalancing initiative should support some margin improvement in the second half. We have trimmed our share-net estimate for 2013, from $15.25 to $15.10, and our 2014 call, from $16.55 to $16.25.
The company continues to invest in growth initiatives and address problem areas, but the operating environment for technology companies has gotten tougher, and growth in key developing nations has slowed recently. Changes in the transmission of computing technology also pose challenges. Reaching its target of earning $20 a share in 2015 may be a push for IBM. Nonetheless, the stock has worthwhile total return potential to 2016-2018, and its high stability rating may appeal to more conservative investors.
About The Company:International Business Machines is a worldwide supplier of advanced information processing technology, communication systems, services, and program products. Revenues in 2012 can be broken down as follows: Global Technology Services, 38%; Global Business Services, 18%; Systems and Technology, 17%; Software, 24%; Global Financing, 2%; Other, 1%. Foreign business accounted for 57% of 2012 revenues.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.