International Business Machines Corp. (NYSE:IBM) shares are down 4% this morning, after the company reported earnings that disappointed investors. IBM is dragging down the Dow Jones with it in today’s trading session. International Business Machines Corp. (NYSE:IBM)has now had several weak revenues Qs in 2012, including this Q. Revenues were $24.75 billion, compared to our estimate of $25.47 billion and consensus of $25.38 billion. Software, GBS and the systems business units all were weak.
Even though IBM’s results have been weak for several Qs, it seems as if IBM’s execution was worse this Q, particularly in services, note BMO analysts. The systems business weakness is likely more IBM specific, with pending product ramps that should help in the Dec quarter. However, the x series, which did not have a product ramp, is still very weak. Therefore, we attribute the revenue miss to some IBM-specific issues and some market issues. Based on directional comments for Q42012, IBM is expecting a strong seasonal Q, which supports the idea that IBM-specific issues negatively affected the Sept Q.
BMO has some other very interesting comments about IBM. They note (emphasis theirs) ‘in the last four quarters, while the EPS has grown by 12% y/y to $14.62 the contribution from revenue growth has been ~ negative $0.19 despite spending close to $3.8 billion on acquisitions, though we note that currency has been a headwind during the period. Further, in the first seven quarter of 2015 roadmap, 43% of EPS growth has been due to share buybacks, 37% due to margin expansion and only 19% from revenue growth. To say it differently, IBM has already used 45% of its targeted EPS growth from buybacks, 43% from margin expansion and 18% from revenue growth in first one-third segment of the 2015 roadmap.’
International Business Machines Corp. (NYSE:IBM) is facing challenges in growing revenues from new signings and scope increases, if we assume that backlog run out is on target. To say it another way, if International Business Machines Corp. (NYSE:IBM) had grown 70% of its total services revs driven by backlog by 3% y/y in CC, the minimum growth in services revs should have been at least 2%. Given actual CC growth has been closer to 1% y/y so far, we think that IBM is struggling to grow revenues from new signings and scope increases which contribute roughly 50% of revenues for transactional business and about 15% for outsourcing business, by our math. Analysts think that services revenue growth needs to stabilize if International Business Machines Corp. (NYSE:IBM) has to realize roughly $1.50 in higher EPS from base revenue growth over its 2015 Roadmap.
Disclosure: No position