IBM Proves the Death of Growth, $20 EPS Target Just Too Costly

Big Blue’s earnings came in up 10% at $3.99 per share on an adjusted basis and sales came in down 4% at $23.72 billion. Thomson Reuters was calling for estimates of $3.96 EPS but on sales of closer to $24.75 billion. Our view is that there is very little to get excited about in this earnings report and shares are taking it on the chin as a result.

If you back out restructuring and one-time charges, IBM’s earnings would have been $3.68 per share and that is up 11%. Operating margins were 49.1% on an adjusted basis and 48% on a net basis. IBM also maintained its operational earnings guidance of $16.25 to $16.90 per share versus estimates from Thomson Reuters of $16.89 per share.

IBM is still maintaining that it expects to achieve its long-term plan of $20.00 in earnings per share by the end of 2015. 24/7 Wall St. believes that this earnings target is coming at too high of a price on its core business and that it is possibly gutting itself in the years beyond that target.

The key metric we pay attention to is the backlog of services and this was $141 billion as of the end of the quarter. Last quarter this was put at $141 billion as well. Here are some of the key metrics:

• Software revenue was up 1 percent, and up 2 percent adjusting for currency;
• Key branded middleware up 3 percent; up 4 percent adjusting for currency;
• Services revenue was down 3 percent, up 1 percent adjusting for currency;
• Global Business Services revenue flat, but was up 5 percent adjusting for currency;
• Services backlog was up 2% to $141 billion, but this would have been up 6 percent adjusting for currency;
• Systems and Technology revenue was down 17 percent, and down 16 percent adjusting for currency;
• System z mainframe revenue was up 6 percent; and up 7 percent adjusting for currency;
• Growth markets revenue were down 9 percent, but down only 5 percent adjusting for currency;
• Business analytics revenue was up 8 percent year to date;
• Smarter Planet revenue was up over 20 percent year to date;
• Cloud revenue was up over 70 percent year to date.

IBM shares closed up 1.1% at $186.73 against a 52-week trading range of $178.71 to $215.90, but now shares are trading down over 5% and at a 52-week low in the after-hours trading session.