Research | Annex Bulletins | Quotes | Workshop | Feedback | Clips | Activism | Columns
of IBM’s Third Quarter Business Results
It Could Have Been
Services and Software Now “Officially” Only IBM Growth Segments
PHOENIX, Oct. 16 - When something as extraordinary as the Sep. 11 attack occurs, such a momentous event gives public companies a tremendous opportunity to spin the subsequent news so as to blame even the problems of their own making on the terrorists; to “throw in the kitchen sink,” as the phrase goes.
In light of such an opportunity, John Joyce, the IBM CFO who once earned the headline “A Slam Dunk of Bunk” from us (see Annex Bulletin 2000-04, 1/20/2000), was remarkably restrained in his today’s teleconference with analysts, held after the markets closed. He blamed some of the drop-off in the company’s Americas revenues and new business due to post-911 order deferrals. But he also hailed IBM’s growth (in constant currency) in Europe and Asia/Pacific, the markets that seemed to shrug off the latest American tragedy.
IBM’s third quarter Americas’ revenues were down 6% (-5% in constant currency), as were the total revenues. But the European and Asia/Pacific business grew by 4% and 5% respectively (in constant currency) relative to the same quarter last year. Foreign exchange translations affected the IBM results less negatively in the third period (-3%) than in the first half of this year, when 5% of the company’s revenues were diminished due to this factor alone.
Of course, the Big Blue profit took a beating, with pretax and net earnings dropping by 19% respectively. But after all is said and done, “it could have been worse” seems an apt summary of the IBM third quarter report card.
So stand by for the IBM stock probably to rise when the market opens tomorrow, as some of the analysts’ worst fears have been proven unfounded.
But “it could have been worse” doesn’t mean that things went well for IBM in the third quarter. On the contrary. Only two segments reported actual revenue growth - services and software, of course. And even their growth was nothing to write home about (up 5.4% and 9.7%).
HARDWARE - Dropping Like a Rock. The IBM hardware segment, on the other hand, took a real pounding with a 21% revenue drop. The declines were particularly severe in the Technology and PC sectors, which also lost $328 million in the quarter on declining revenues (down 31% and 36% respectively).
On the other hand, large servers (formerly known as S/390, now renamed zSeries), experienced a resurgence in demand in MIPS (up 42%). Both IBM chairman, Lou Gerstner in a statement, and the CFO Joyce in the teleconference, rushed to congratulate themselves on that. And indeed, the Enterprise Systems’ third quarter revenues also soared by 30% to $3.2 billion.
Unfortunately for the IBM shareholders, all this hoopla was much ado about nothing. By the time the MIPS and revenues increased trickled down to the bottom line, the Enterprise Systems’ pretax profit was actually DOWN 29% to only $174 million.
SERVICES - Excellent Offence, Lousy Defense. As you’ve already seen, the IBM Global Services (IGS) revenues were up 5.4% (9% in constant currency). Considering a 2% decline in maintenance revenues, we estimate that the “real” IT services growth was about 7% (about 11% in constant currency).
Trying to spin the good news items as much as possible, Joyce spent most of the time talking about the 13% growth in outsourcing, and 16% increase in integrated technology services revenues.
But as usual when it comes to this IBM executive team, the untold stories are the juiciest. In this quarter, IBM hailed the $10 billion of new contract signings as an indication that it was gaining market share against its competitors. To reinforce this dubious theory, Joyce said that these new signings “grew our backlog to $97 billion.” The implication being that the backlog jumped from $87 to $97 billion.
Now, not so fast, Mr. Joyce. IGS’s backlog at the end of the second quarter was $95 billion. Which means that after IBM had added $10 billion of new business to it, the backlog only grew by $2 billion! In other words, $10 billion in; $8 billion out.
Nor was this just a third quarter phenomenon. As you can see from the chart on page two, we’ve now gone back to the end of 1999, and see a similar pattern throughout the last two years or so. IBM’s cancellations and expirations have averaged around $8 billion per quarter. So IBM has to sell that much of new business just to stay even!
Since 1999, IGS has added $91 billion in new contract value, yet its backlog has grown by only $37 billion during the same period. Which means that nearly 60% of IBM’s new contract sales go up in smoke every quarter due to losses at the other end.
To borrow a football analogy, this suggests that IGS plays excellent offence and lousy defense.
On the other hand, IGS’s profitability has improved pretty dramatically. The services’ third quarter gross margin reached 25%, up over three points since the year-ago period. The services profitability has now surpassed that of the declining hardware gross margins (24%) for the first time ever.
In terms of the overall profitability, the services segment (including maintenance) is a standout winner at IBM hands down. Its third quarter $1.37 billion of pretax profit represents nearly 2/3 of the IBM total, and is almost double that of the second best IBM sector - software, with a $704million pretax profit.
Guess too many “fire sales” of the “popular” zSeries (S/390) servers can’t be all that good for the bottom line after all. But, guess IBM must have figured that’s better than giving them away.
Which is par for the course when it comes to IBM executive “prescience.” Here’s what the Big Blue chairman said in his today’s release: “Customers now allocate an increasing percentage of spending to solutions, not boxes.”
Welcome aboard, Mr. Gerstner! Way to catch on to “contemporary” trends - of more than 11 years ago. For, that’s something we said back in March of 1990:
Time for LVG to head for a golf course?
Happy bargain hunting!
Volume XVII, No. 2001-19
Editor: Bob Djurdjevic
P.O. Box 97100, Phoenix, Arizona
|Annex Research | Annex Bulletins | Quotes | Workshop | Feedback | Clips | Activism | Columns