Why IBM Failed To Impress

| About: International Business (IBM)

International Business Machines (NYSE:IBM) is an industry leader that has seen its stock price perform very well over the past four years, having steadily climbed from $100 to over $200. But IBM is now facing some trouble after recently reporting their Q1 2013 results. IBM reported revenue of $23.4 billion (down 5%) and a GAAP net income of $3.0 billion (down 1%). These numbers were worse than expectations, and thus IBM dipped well over 8% in intra-day trading.

IBM is partly attributing its disappointing earnings to an inability to close some big deals by the end of the quarter, and currency fluctuations with the Japanese yen. Regarding the first reason, senior vice president Mark Loughridge commented as follows:

We had solid profit performance in January, but as the quarter ended hundreds of millions of dollars of very profitable software and System z mainframe deals fell short of the goal line. This impacted the first quarter close, but the rollover of these deals positions us for a strong start in our software and mainframe business in the second quarter. Taking full consideration of our first quarter performance and the number of actions to improve this performance, we continue to expect operating EPS of at least $16.70 for the year.

IBM did, in fact, have many deals (more than $400 million of mainframe software and intellectual property) that went just over the deadline for Q1 2013, and this revenue will be counted in Q2 2013. But even if IBM had sealed these deals within Q1 2013, its revenue would still have been far below expectations. It was forecasted for IBM to earn $24.65 billion in Q1 2013 (relatively unchanged), when it only earned $23.4 billion. That is a substantial gap of $1.25 billion that an additional $400 million in revenue would have failed to cover well.

Losses Related To Currency Fluctuations

Loughridge also commented that IBM's earnings were adversely affected by depreciation of the Japanese yen. IBM has substantial operations in Japan and had a 3% revenue increase there for Q1 2013, which marks its second consecutive quarter of revenue growth in Japan. As most of IBM's revenue in Japan is derived from services, it was difficult to hedge the Japanese yen to protect its risk.

The Japanese yen has indeed lost much of its value in relation to the United States dollar since the beginning of 2013, and this is a legitimate cause of IBM's lower revenue. At the beginning of 2013 1 USD was roughly 86 Japanese yen, whereas now 1 USD is 99 Japanese yen. Hedging currencies (which involves eliminating risk from fluctuations in the market by shorting the same amount of a currency that one is essentially long on) is a standard practice for large companies with significant business operations in foreign countries.

Is The Primary Cause For IBM's Revenue A Slump In The Economy?

As IBM is by far the most dominant player in the tech industry, its earnings results are often read as an indication of the health of the entire industry. We know that beyond IBM, other major tech companies such as Oracle (NASDAQ:ORCL) and Tibco (NASDAQ:TIBX) have also seen a decline in their sales figures, and the PC industry is facing some uncertainty with the advent of newer devices. Economic problems in many of the countries IBM operates in also have an impact on its results. I do believe that these outside circumstances beyond IBM's control are largely responsible for its disappointing Q1 2013 results, given how many tech companies have reported lower-than-expected earnings.

Final Thoughts

Even after its disappointing Q1 2013 results, IBM remains a tech powerhouse and I believe that we could see better results in Q2 2013 as the deals from Q1 2013 roll over, the Japanese yen potentially stabilizes and IBM continues to expand in international markets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.