IBM delivers mixed Q3, notes divestment talks drag

IBM delivers mixed Q3, notes divestment talks drag

Summary: Big Blue's earnings topped estimates, but sales didn't. The company also said it's unlikely that a second half earnings pop will land because of "elongated discussions for its larger divestiture project."

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IBM's second quarter earnings were better than expected, but revenue fell short of expectations as systems and technology sales fell 12 percent from a year ago. IBM also cut its 2013 outlook and noted

Big Blue reported second quarter earnings of $3.2 billion, or $2.91 a share, on revenue of $24.9 billion, down 3 percent from a year ago. Non-GAAP earnings, which exclude charges due to a recent restructuring, were $3.91 a share.

Wall Street was looking for second quarter earnings of $3.77 a share on revenue of $25.36 billion.

As for the outlook, IBM said that it doesn't expect a second half earnings pop due to a gain it was expecting. The company projected non-GAAP earnings of $16.90 a share excluding $1 billion in restructuring charges, and $16.25 including them. IBM projected 2013 net earnings of $15.08 a share.

For 2013, Wall Street was expecting IBM to report non-GAAP earnings of $16.63 a share with a net earnings figure of $15.59.

It's also worth noting that IBM said its outlook will take a 45 cents a share hit to 2013 earnings due to "elongated discussions for its larger divestiture project." That project could refer to reports that IBM was trying to unload its commodity server business.

Speaking on an earnings conference call, CFO Mark Loughridge sounded upbeat about the second half and IBM's ability to transition. Loughridge didn't mention what IBM was looking to unload, but he said a major divestment won't close in 2013. He said:

The substantial second half gain that we were counting on in our view of EPS will not likely close by the end of this year. But we're still in active discussions. As you know, we have a very disciplined M&A process. We're not going to underprice or rush a divestiture simply to close within 2013.

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In a statement, IBM CEO Ginny Rometty said the company will "continue investing in our strategic growth initiatives, acquiring and divesting capabilities, re-balancing skills and taking action in the areas that are not performing."

Among the key points from Loughridge:

  • The "workforce rebalancing" will improve earnings going forward.
  • IBM had strong performance in Latin America, notably Brazil.
  • "UK and Spain not only improved but you grew in the quarter. And Asia-Pacific, revenue was flat. Within that, Japan's revenue was up 3% with good performance across hardware, Software and Services."
  • Loughridge talked up the acquisition of SoftLayer as a way to "accelerate the buildout of our public Cloud infrastructure."

Loughridge was asked what made him confident about the second half of the year given IBM is likely to be helped by a lower tax rate. Loughridge said:

As we look at the second half, we have some very, very distinct tailwinds that we have driven to drive our performance. So first of all, we've got a very good software pipeline going into the second half of the year and if you look at that software performance in the second quarter. Not only did software grow, the total by 5%, but that key branded middleware was up 10% and we gained share in every single one of the sub-brands in that software business. We see real momentum going from that second quarter into the second half of the year. Secondly, we have services backlog growth on a constant currency basis of 7%. That is the best backlog growth positioning we've had in four years, going into the second half.

By unit, IBM said that hardware revenue was $3.8 billion in the second quarter, down 12 percent from a year ago. Power Systems sales fell 25 percent, System x fell 11 percent and System z mainframe revenue was up 10 percent. 

Software revenue was $6.4 billion, up 5 percent adjusting for currency, in the second quarter.

Services revenue also fell. Global Technology Services revenue fell 5 percent in the second quarter to $9.5 billion. Business services revenue fell 1 percent to $4.6 billion. 

IBM delivered a mixed picture globally with flat sales in growth markets and Asia Pacific revenue falling 8 percent.

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Topics: Data Centers, Big Data, Cloud, Enterprise Software, Hardware, IBM, Servers

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