Why IBM Fell Yesterday | The Mesh Report

Why IBM Fell Yesterday

the Mesh Report Staff July 20, 2010 0

IBM (IBM.N) disappointed investors by reporting a decline in new technology services contracts in the second quarter, while a weaker euro hit revenue more than expected, sending its shares down more than 4 percent.

While firm growth in the company’s higher-margin software unit and sales in emerging markets bolstered profit, Monday’s results were not as good as investors had wanted to see from the world’s biggest technology services company.

Some analysts said International Business Machines Corp’s results may weigh on technology shares on Tuesday, dampening expectations that corporate IT spending was on the rebound following sterling numbers from Intel Corp (INTC.O).

“Revenues were not as strong as people were expecting. There were some currency hits …. But even with that, it might have been a little bit weaker than people were expecting,” said Mark Demos, portfolio manager at Fifth Third Asset Management, an IBM shareholder.

“We’re coming out of the recession, and services signings is one of the indicators that people would like to see at least grow from year over year.”

IBM said its second-quarter revenue rose 2 percent to $23.7 billion. Analysts on average had expected $24.2 billion, according to Thomson Reuters I/B/E/S.

Big Blue blamed currency rates for reducing revenue by about $500 million in the quarter.

“If you really look at the difference to analysts expectations, the difference is all currency,” said Chief Financial Officer Mark Loughridge.

But analysts said were also concerned about the low signings of services deals, a key indicator of future revenue. Signed services contracts fell 12 percent to $12.3 billion, while total outsourcing services signings decreased 19 percent to $6.5 billion, it said.

Brian Marshall, analyst at Gleacher & Co, as well as Fifth Third’s Demos had expected services contracts of around $14 billion.

“They were clearly affected from forex headwinds, but at the end of the day, IBM continues to suffer from the law of large numbers,” Marshall said. “The company is struggling to find good growth opportunities.”

Loughridge explained that some contracts had slid into the new quarter, and that revenue should grow in the third quarter regardless of currency fluctuations.


Net profit slightly exceeded expectations and rose to $3.4 billion, or $2.61 a share, from $3.1 billion, or $2.32 a share, a year earlier. Wall Street had forecast $2.58 a share.

Despite the solid showing in its bottom line, the company’s shares fell 3 percent after-hours to $125.60 after closing at $129.79 on the New York Stock Exchange.

The company’s higher outlook for full-year earnings — of “at least $11.25” per share, up from “at least $11.20” previously — helped little.

IBM shares have fallen about 2 percent over the past quarter as investors focused on technology companies such as Apple Inc (AAPL.O) and VMware Inc (VMW.N) which are enjoying double-digit percentage revenue growth.

Analysts said the decline in services signings was especially disappointing given that its main rival Accenture Ltd (ACN.N) recently posted solid bookings.

But few were recommending selling IBM shares, given the company’s solid earnings growth. This was its 30th consecutive quarter of year-on-year improvement in earnings per share, and the company has said it plans to double its profit by 2015.

One of the strongest areas of revenue growth in the quarter was emerging markets, which showed a 14 percent gain year-on-year.

Edward Jones analyst Andy Miedler said he was keeping his “buy” recommendation on the shares, saying they were attractively valued at around 11 times earnings forecasts and investors could depend on management to delivering earnings growth.

“Investors definitely wanted to see more in terms of bookings and revenue growth, but we expect them to continue to deliver and move profitability higher,” he said.

IBM, which bought PwC Consulting from PricewaterhouseCoopers in 2002 and sold its personal computer business to Lenovo Group (0992.HK) in 2005, has spent the past decade shifting away from commoditized hardware products, focusing instead of more profitable software and services.

Its quarterly gross profit margin also inched up to 45.6 percent from 45.5 percent, helped by higher profitability in its software and services business.

Shares of IBM slid to $124.51 after hours from a regular-session close of $129.79. Analysts said disappointment over IBM’s results contributed to the 5.8 percent fall in shares of Texas Instruments Inc (TXN.N), which also reported weaker-than-expected revenue on Monday.

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