IBM Looks Solid

On April 17, IBM (IBM) reported a strong first quarter that beat all estimates. Revenue was $24.5 billion, up 11% y-o-y and down 15% sequentially and diluted EPS was $1.65 per share, up 36% y-o-y and down 41% sequentially. Analyst estimates were a profit of $1.45 a share on revenue of $23.7 billion. It bought back shares worth $2.7 billion in the quarter.

Segment-wise, revenue from Global Technology Services grew 17% to $9.7 billion, and Global Business Services grew 17% to $4.9 billion. Its Global Financing segment revenues grew 3% to $633 million.

Revenues from the Systems and Technology segment were down 7% to $4.2 billion for the quarter. Excluding the impact of Printing System Division divestiture in June 2007, the segment revenues were down 2%. Within the segment, the new z10 enterprise class server helped in increasing System z server product revenue by 10%. According to IDC, IBM continued to lead the worldwide server systems market with 36.7% market share (HP is No.2 with 27.7%) in factory revenue for 4Q 2007 driven by solid performance from its System x and System p servers. However in the first quarter, revenue from System x servers was flat.

Revenues from the Software segment grew 14% to $4.8 billion. Revenue from middleware products grew 16% to $3.8 billion and Information Management software grew 27% including growth from the Cognos (COGN) acquisition that was completed in the quarter.

Speaking of acquisitions, IBM completed six other acquisitions in the quarter including Arsenal Digital Solutions, Net Integration Technologies, and Solid Information Technologies. It recently acquired data de-duplication software developer, Diligent Technologies and announced its plans to acquire FilesX, a privately held storage software company.

Region-wise, revenue from Americas grew 8% to $9.9 billion, Europe/Middle East/Africa grew 18% to $8.8 billion, and Asia-Pacific grew 14% to $5.1 billion. It is creating a new Growth Markets organization based in Shanghai to accelerate global growth.

IBM is also making efforts to increase its SMB market share. In January, it entered into an agreement with Lenovo for manufacturing and selling a range of its x86 servers. And on Sunday, it launched Vertical Industry Program [VIP] that addresses key IT requirements for SMBs.

Clearly its global strategy, acquisition strategy, and the percentage increase of software in its business mix are paying off. Despite the economic downturn, U.S. growth accelerated from 2% in Q4 2007 to 6% in Q1 2008. It now expects 2008 full year EPS of at least $8.50, or a growth of 18%, up from its earlier estimate of 15% to 16% EPS growth.

The stock is trading around $124, and hit a 52-week high of $125 on April 18. Its market cap is around $171 billion.

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Comments

[DeaverB]

Well thought through. Obvious--but the author deserves the kudos for it. Thank you.

[User 49180]

Good sumary -- the gross Margin yoy Q1 growth of 1.3% was very good news. Also, the IBM CFO pointed out that IBM is calendar back loaded for cash flow and that it was the first Q1 in 5 years that was cash flow positive without considering one-time items like pension cost savings.