We have recently downgraded our outlook on IBM (IBM) following mixed Q1 2012 results. This stock reported $2.78 operating EPS which exceeded the street's $2.65, while $24.67bn revenue was slightly shy of $24.82bn consensus. 2012 EPS guidance for "at least $15" largely maintains the original full-year view after accounting for this quarter's $01.13 beat.
This stock has EPS of $2.78 in Q1 which benefited from a one-time tax restructuring in Latin America. Adjusting for this alone would imply a $0.02 EPS miss; however, the benefit was reinvested in $225m of restructuring opportunities that would not have otherwise been undertaken.
This stock had profit growth in its software business unit of 12% on 7% reported revenue growth. Software continues to drive the overall mix leading to a 2.30% year over year improvement in overall operating margin. Services signings grew 15% year over year including 11% growth in transactional signings which we view as a near-tem indicator of performance.
Revenue from Americas grew 1% year over year with 9% growth in Canada. Japan was a source of weakness declining 7% year over year. Growth markets grew 9% on a reported basis and outperformed major markets.
This stock ended the quarter with cash and investments of $12.3bn and a non-financing debt of $8.5bn. The company spent approximately $3.9bn n share repurchases in the quarter and IBM has $5.7bn remaining in the current authorization for share repurchases. The balance sheet remains very strong.
IBM continues to focus on big data and not only the power of analytics but also the increasing importance of Chief Marketing Officers. IBM suggests that the CMO will spend more than a CIO by 2017. We do not necessarily feel this is the case and feel the company should focus more on technology rather than a specific role within the organization.
Given the company's focus and minimal growth, we feel IBM is a hold in the current bear stock market. Additional risks to growth include broad deterioration in IT spending, competition from Oracle (ORCL) and a failure to expand market share in cloud computing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
