Totally Rotten IBM Earnings, With Lower Backlog and Margins

By Jon C. Ogg Published Oct 20, 8:10AM EDT

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International Business Machines Corp. (NYSE: IBM) has released its third-quarter earnings early Monday morning, an unusual date and time for the IT services giant. IBM reported $3.46 in earnings per share (EPS), down 8% from a year ago’s report of $3.77 per share. What investors need to understand here is that IBM’s earnings report is weak enough that it will act as a big drag on the Dow Jones Industrial Average, due to its large weighting of the index. This will also weigh on many old-school technology and IT players.

What investors should know is that this earnings report is also bad enough that there should have likely been a warning issued by the company long before this formal report. Also, there was no mention of the formal $20 EPS target by the end of 2015.

Diluted earnings from continuing operations, the non-GAAP report covered by analysts, fell by 10% to $3.68 per share. Total revenues from continuing operations were down by 4% to $22.4 billion, but these would have been down 2% if adjusting for the impact of the divested customer care outsourcing business and for currency. Thomson Reuters had the consensus estimates at $4.32 EPS and $23.37 billion in revenues. In short, this was a car wreck of a quarter. The net income from continuing operations was also down 17% to $3.5 billion, and operating (non-GAAP) net income from continuing operations was down 18% to $3.7 billion.

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Here was our recent look at the performance of IBM under Ginny Rometty versus the broad market, and that poor return was long before this report.

The estimated services backlog at September 30, 2014, was down 7% to $128 billion, adjusting for the divested customer care outsourcing business. This was down 2% if adjusting for currency. That being said, IBM’s backlog is the future business and this indicates pressure ahead as well.

IBM said that its gross profit margin from continuing operations was down 40 basis points on a GAAP basis to 48.6% and down 90 basis points on an operating and non-GAAP basis to 49.2%.

On geographic regions:

The Americas’ third-quarter revenues were down 2% to $10.1 billion, or down 1% adjusting for currency.
Revenues from Europe/Middle East/Africa were down 2% to $7.2 billion, or down 3% if adjusting for currency.
Asia-Pacific revenues were down 9% to $5.0 billion, or down 8% if adjusting for currency.
Revenues from “growth markets” were down 6%, or down 5% if adjusting for currency, and revenues in the BRIC countries (Brazil, Russia, India and China) were down 7%.

Individual unit performance was as follows:

Cloud revenue was up more than 50% year-to-date, and cloud delivered as a service was up 80% year-to-date with a third-quarter annual run rate of $3.1 billion.
Business analytics revenue was up 8% year-to-date.
Mobile revenue was up over 100% year-to-date.
Security revenue was up over 20% year-to-date.

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IBM chairman, president and chief executive officer, Ginni Rometty, said:

We are disappointed in our performance. We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry. While we did not produce the results we expected to achieve, we again performed well in our strategic growth areas — cloud, data and analytics, security, social and mobile — where we continue to shift our business. We will accelerate this transformation. We are executing on a clear strategy that is moving IBM to higher value, and we’ve taken significant actions to exit nonstrategic elements of the business. This includes the announcement that we will divest semiconductor manufacturing to focus on research and development that will differentiate our systems. We will continue to make the investments and the changes necessary to manage our business for the long term. And we remain fully committed to returning significant value to shareholders through dividends and share repurchase.

IBM expenses were listed as follows:

Total expense and other income from continuing operations increased 1 percent to $6.5 billion compared with the prior year period. S,G&A expense of $5.3 billion was flat year over year. R,D&E expense of $1.4 billion was flat compared with the year-ago period. Intellectual property and custom development income decreased to $145 million compared with $191 million a year ago. Other (income) and expense was income of $103 million compared with prior-year income of $63 million. Interest expense increased to $126 million compared with $97 million in the prior year period.

IBM shares closed up 1.25 at $182.05 on Friday, but the shares were indicated down more than 7.5% lower around $168 on Monday morning. Its 52-week range is $172.19 to $199.21, and analysts had a consensus price target objective of $192.05 prior to this disappointing report.

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About the Author Jon C. Ogg →

Jon Ogg has been a financial news analyst since 1997. Mr. Ogg set up one of the first audio squawk box services for traders called TTN, which he sold in 2003. He has previously worked as a licensed broker to some of the top U.S. and E.U. financial institutions, managed capital, and has raised private capital at the seed and venture stage. He has lived in Copenhagen, Denmark, as well as New York and Chicago, and he now lives in Houston, Texas. Jon received a Bachelor of Business Administration in finance at University of Houston in 1992. a673b.bigscoots-temp.com.