After the Tuesday market close, International Business Machines (IBM - Free IBM Stock Report), a global computer mainframe, software, and services company and a component of the Dow 30, reported results for the December quarter that provided some relief to investors worried about recent weak revenue trends at the technology giant. The stock advanced strongly in Wednesday morning trading.
In the December quarter, the company earned $5.13 a share, up 11% from results in the year-earlier period of $4.62 and 4% over our estimate of $4.92. For all of 2012, IBM logged earnings of $14.37 a share compared with our estimate of $14.20 and the $13.06 recorded in 2011. Reported results for the 2012 December quarter and full year included $0.26 and $0.88, respectively, of acquisition-related, retirement, and other so-called nonoperating expenses. Margins continued to benefit from productivity initiatives and growth in highly profitable areas, like software.
The good news, however, was that revenue in the December quarter slipped only 1% year to year, an improvement over declines of 3% and 5% in the June and September terms. In fact, December-period revenues would have risen 1% on a constant-currency basis and excluding the revenues of a retail point-of-sale equipment business divested last August.
Revenues in IBM's software business rose 3% over the year-earlier period compared with a 1% decline in the June interim, aided by strong performances from key branded middleware software, acquisitions, and growth initiatives like business analytics, smarter commerce, and cloud computing. The software gross margin expanded both on a consecutive-quarter and year-to-year basis, to a very attractive 90.6%.
The company's other segments reported smaller revenue declines. Global technology services and global business services reported year-over-year quarterly revenue declines of 2% and 3%, respectively, an improvement over declines of 4% and 6% in the June period. IBM's efforts to address low-margined outsourcing contracts had a negative effect on revenues, but supported better margins. In addition, revenues from existing base accounts, which are more transactional in nature and economically sensitive, also declined. Margins improved in both services segments on a year-over-year basis, but the margin in business services wasn't as wide as in the June period.
Finally, computer hardware revenues slipped 1% from the year-earlier quarter compared with the 13% decline posted in the September period. On a constant-currency basis and excluding the divested point-of-sale equipment business, computer hardware revenues would have risen 4%. Of note, revenues from IBM's new System z mainframe computers advanced 56% overall, and 65% in emerging-nation markets. Although revenues from Power Systems fell 19%, new mid-range and high-end Power servers performed well. The computer hardware segment's margin expanded on both a sequential-period and year-over-year basis.
For 2013, management looks for IBM to earn $15.53 a share, including $1.17 of acquisitions and other nonoperating expenses. We are raising our share-net estimate for the current year by a nickel, to $15.55. We expect revenues from the System z mainframes and new Power Systems servers to ramp up further. Growth in emerging markets, in key areas like cloud computing, and in the high-margined software business are likely to support modest top-line improvement and the 8% share-net increase that management expects. Efforts to strengthen services margins should also contribute to the good year-ahead results that we anticipate.
The encouraging December-quarter results and strong cash-flow generation, as well as the positive year-ahead outlook, suggest another healthy dividend increase may be in the offing in the June quarter. Although the stock's recent strength discounts a lot of its potential to the 2015-2017 time frame, IBM shares are still a solid selection for conservative investors.
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.