Lower Growth at IBM (IBM)

International Business Machines Corp. (NYSE: IBM) has reported its Q2-2010 earnings.  The pro forma numbers were $2.61 EPS and 2% revenue growth (adjusted for currency) $23.72 billion in revenues, although IBM noted that some $500 million was lost in revenues due to currencies.  Thomson Reuters had estimates of $2.58 EPS (vs. $2.32 a year ago) and $24.17 billion in revenues.   IBM’s total gross profit margin was 45.6% versus 45.5% in the 2009 second-quarter period.

As far as guidance, IBM said it now sees Full-year 2010 EPS expectations raised to at least $11.25.  The problem is that Thomson Reuters is now already at $11.27 EPS.  Investors have been used to higher earnings guidance, but today’s ‘better’ guidance is just not going to do much to make the grade.

The key metric we watch here is that services order backlog for future growth.  IBM said its services backlog came in at $129 billion at the end of the quarter.  This backlog is lower than the $134 billion last quarter and that was lower than the quarter before as well.  The company actually said that this figure is UP $1 billion after you adjust for currency.

IBM signed services contracts totaling $12.3 billion, at actual rates, a decrease of 12%. Business Analytics revenue was up up 14%; and software revenue rose 2%, but that would have been up 6% if you exclude divested PLM operations.

Total Global Services revenues rose 2%, but were just up 1% if you adjust for currency.  Total Outsourcing services signings fell by 19%.  transactional services measured by Consulting, Integrated Technology Services and Application Management Systems Integration fell by 3%.

Software segment revenues rose 2%, while WebSphere revenues increased 17%.  Business Analytics operations within Global Business Services and Software rose 14%.

The buybacks continue from the company.  IBM said it ended the quarter with $12.2 billion of cash and generated free cash flow of $3.0 billion.  The company returned $4.9 billion to shareholders through $800 million in dividends and $4.1 billion of share repurchases.

IBM shares closed up unofficially by 1.4% at $129.79 and the 52-week trading range is $106.79 to $134.25.  While some numbers can be explained here, it is obvious that shareholders wanted more.  The stock is trading down 3.75% and just under the $125.00 handle in the after-hours session.

A preview for the other 10 DJIA components reporting earnings is available here.

JON C. OGG