Arik Hesseldahl

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IBM Posts a Q2 Revenue Miss, but Boosts Estimates For 2012

IBM just reported its results for the second quarter. The early highlight is that it missed the consensus of analysts on revenue but beat the street’s expectations on per-share earnings.

Earnings were $3.51 a share, up 14 percent year on year, on sales of $25.8 billion, versus the expected $26.3 billion on the top line and EPS of $3.43. This marks the 38th consecutive quarter that IBM has reported earnings growth.

The problem with the top line appears to have to do with currency issues. Stronger foreign currencies are hurting IBM’s ability to record revenue when it converts those payments into dollars. The company says that it saw a $1 billion revenue impact from the currency impact.

The bigger news is that Big Blue raised its estimates for the full year. Having previously said it expects to earn $15 a share this year, it’s now saying it will earn at least $15.10.

IBM shares rose $4, or more than 2 percent, to $192.25 in after-hours trading.

To illustrate the currecy effect, it’s worth looking at the IBM results in segments. Revenue in several were flat or actually down versus the year-ago period, but less down or flat on a constant currency basis. See this slide from IBM’s presentation.

You see a similar situation across geographies: Sales in the Americas were $11.1 billion, down 1 percent, or up 1 percent on a constant currency basis. Europe was down 9 percent to $7.9 billion, which was flat on a constant currency basis. Asia sales were up 2 percent, or 4 percent on a constant currency basis.

I’ll have more as I go through the numbers and listen to the conference call. Below is IBM’s original announcement.

IBM REPORTS 2012 SECOND-QUARTER RESULTS

– Diluted EPS:

– GAAP: $3.34, up 11 percent;
– Operating (non-GAAP): $3.51, up 14 percent;

– Net income:

– GAAP: $3.9 billion, up 6 percent;
– Operating (non-GAAP): $4.1 billion, up 8 percent;

– Gross profit margin:

– GAAP: 47.6 percent, up 1.2 points;
– Operating (non-GAAP): 48.2 percent, up 1.5 points;

– Revenue: $25.8 billion, down 3 percent, up 1 percent adjusting for currency;
– Free cash flow of $3.7 billion, up 9 percent;
– Software revenue, flat, up 4 percent adjusting for currency;
– Services revenue down 3 percent, up 1 percent adjusting for currency:

– Services pre-tax income up 18 percent;
– Services backlog of $136 billion, down 6 percent, flat adjusting for currency;
– Systems and Technology revenue down 9 percent, down 7 percent adjusting for
currency;
– Growth markets revenue up 2 percent, up 8 percent adjusting for currency;
– Business analytics revenue up 13 percent in the first half;
– Smarter Planet revenue up more than 20 percent in the first half;
– Cloud revenue doubled first-half 2011 revenue;
– Full-year 2012 operating (non-GAAP) EPS expectations raised to at least
$15.10 from at least $15.00.

ARMONK, N.Y., July 18, 2012 . . . IBM (NYSE: IBM) today announced second-quarter 2012 diluted earnings of $3.34 per share, compared with diluted earnings of $3.00 per share in the second quarter of 2011, an increase of 11 percent. Operating (non-GAAP) diluted earnings were $3.51 per share, compared with operating diluted earnings of $3.09 per share in the second quarter of 2011, an increase of 14 percent.
Second-quarter net income was $3.9 billion compared with $3.7 billion in the second quarter of 2011, an increase of 6 percent. Operating (non-GAAP) net income was $4.1 billion compared with $3.8 billion in the second quarter of 2011, an increase of 8 percent.
Total revenues for the second quarter of 2012 of $25.8 billion were down 3 percent (up 1 percent, adjusting for currency) from the second quarter of 2011. Currency negatively impacted revenue growth by approximately $1 billion.
“In the second quarter, we delivered strong profit, earnings per share and free cash flow growth. This performance reflects continued strength in our growth initiatives and investments in higher value opportunities,” said Ginni Rometty, IBM president and chief executive officer. “These are fundamental elements of our long-term business model.
“Looking ahead, we are well positioned to deliver greater value to a wider range of clients and to our shareholders. Given our performance in the first half and our outlook for the second half, we are raising our full-year operating earnings per share expectations to at least $15.10.”

Second-Quarter GAAP – Operating (non-GAAP) Reconciliation
Second-quarter operating (non-GAAP) diluted earnings exclude $0.17 per share of charges: $0.11 per share for the amortization of purchased intangible assets and other acquisition-related charges, and $0.06 per share for retirement-related charges driven by changes to plan assets and liabilities primarily related to market performance.

Full-Year 2012 Expectations
IBM raised its expectations for full-year 2012 GAAP diluted earnings per share to at least $14.40 from at least $14.27 and operating (non-GAAP) diluted earnings per share to at least $15.10 from at least $15.00. The 2012 operating (non-GAAP) earnings expectations exclude $0.70 per share of charges for amortization of purchased intangible assets, other acquisition-related charges, and retirement-related charges driven by changes to plan assets and liabilities primarily related to market performance.
Geographic Regions
The Americas’ second-quarter revenues were $11.1 billion, a decrease of 1 percent (up 1 percent, adjusting for currency) from the 2011 period. Revenues from Europe/Middle East/Africa were $7.9 billion, down 9 percent (flat, adjusting for currency). Asia-Pacific revenues increased 2 percent (up 4 percent, adjusting for currency) to $6.3 billion. OEM revenues were $512 million, down 24 percent compared with the 2011 second quarter.

Growth Markets
Revenues from the company’s growth markets increased 2 percent (up 8 percent, adjusting for currency) and more than 30 countries had double-digit revenue growth, adjusting for currency. Revenues in the BRIC countries — Brazil, Russia, India and China — increased 5 percent (up 12 percent, adjusting for currency).

Services
Global Technology Services segment revenues decreased 2 percent (up 2 percent, adjusting for currency) to $10.0 billion. Global Business Services segment revenues were down 4 percent (down 1 percent, adjusting for currency) to $4.7 billion.
Pre-tax income from Global Technology Services increased 24 percent and pre-tax margin increased to 17.1 percent. Global Business Services pre-tax income increased 7 percent and pre-tax margin increased to 16.6 percent.
The estimated services backlog at June 30 was $136 billion, down 6 percent year over year at actual rates (flat, adjusting for currency).

Software
Revenues from the Software segment were $6.2 billion, flat (up 4 percent, adjusting for currency) compared with the second quarter of 2011. Software pre-tax income increased 8 percent and pre-tax margin increased to 35.9 percent.
Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.9 billion, flat (up 4 percent, adjusting for currency) versus the second quarter of 2011. Operating systems revenues of $628 million were flat (up 3 percent, adjusting for currency) compared with the prior-year quarter.
Revenues from the WebSphere family of software products increased 3 percent year over year. Information Management software revenues decreased 1 percent. Revenues from Tivoli software increased 2 percent. Revenues from Lotus software decreased
8 percent, and Rational software decreased 7 percent.

Hardware
Revenues from the Systems and Technology segment totaled $4.3 billion for the quarter, down 9 percent (down 7 percent, adjusting for currency) from the second quarter of 2011. Systems and Technology pre-tax income decreased $159 million.
Total systems revenues decreased 7 percent (down 5 percent, adjusting for currency). Revenues from Power Systems were down 7 percent compared with the 2011 period. Revenues from System x were down 8 percent. Revenues from System z mainframe server products decreased 11 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), decreased 8 percent. Revenues from System Storage decreased 4 percent, and revenues from Retail Store Solutions decreased 4 percent year over year. Revenues from Microelectronics OEM decreased 22 percent.

Financing
Global Financing segment revenues were flat (up 4 percent, adjusting for currency) in the second quarter at $517 million. Pre-tax income for the segment increased 6 percent to $528 million.
***
The company’s total gross profit margin was 47.6 percent in the 2012 second quarter compared with 46.4 percent in the 2011 second-quarter period. Total operating (non-GAAP) gross profit margin was 48.2 percent in the 2012 second quarter compared with 46.8 percent in the 2011 second-quarter period, with increases in Global Technology Services and Global Business Services.
Total expense and other income decreased 5 percent to $7.1 billion compared with the prior-year period. S,G&A expense of $5.8 billion decreased 3 percent year over year. R,D&E expense of $1.6 billion increased 1 percent compared with the year-ago period. Intellectual property and custom development income decreased to $289 million compared with $295 million a year ago. Other (income) and expense was income of $132 million compared with prior-year expense of $97 million. Interest expense increased to $117 million compared with $97 million in the prior year.
Total operating (non-GAAP) expense and other income decreased 6 percent to $7.0 billion compared with the prior-year period. Operating (non-GAAP) S,G&A expense of $5.7 billion decreased 4 percent compared with prior-year expense. Operating (non-GAAP) R,D&E expense of $1.6 billion was flat compared with the year-ago period.
Pre-tax income increased 6 percent to $5.2 billion and pre-tax margin of 20.0 percent, up 1.7 points compared with the prior-year period. Operating (non-GAAP) pre-tax income increased 8 percent to $5.4 billion and pre-tax margin was 21.1 percent, up 2.2 points.
IBM’s tax rate was 24.8 percent, down 0.2 points year over year; operating (non-GAAP) tax rate was 25.0 percent, flat compared to the year-ago period.
Net income margin increased 1.3 points to 15.1 percent. Total operating (non-GAAP) net income margin increased 1.6 points to 15.8 percent.
The weighted-average number of diluted common shares outstanding in the second-quarter 2012 was 1.16 billion compared with 1.22 billion shares in the same period of 2011. As of June 30, 2012, there were 1.14 billion basic common shares outstanding.
Debt, including Global Financing, totaled $32.4 billion, compared with $31.3 billion at year-end 2011. From a management segment view, Global Financing debt totaled $22.6 billion versus $23.3 billion at year-end 2011, resulting in a debt-to-equity ratio of 7.0 to 1. Non-global financing debt totaled $9.8 billion, an increase of $1.8 billion since year-end 2011, resulting in a debt-to-capitalization ratio of 36.1 percent from 32.0 percent.
IBM ended the second-quarter 2012 with $11.2 billion of cash on hand and generated free cash flow of $3.7 billion, excluding Global Financing receivables, up approximately $0.3 billion year over year. The company returned $4.0 billion to shareholders through $1.0 billion in dividends and $3.0 billion of share repurchases.

Year-To-Date 2012 Results
Net income for the six months ended June 30, 2012 was $6.9 billion compared with $6.5 billion in the year-ago period, an increase of 6 percent. Diluted earnings per share were $5.95 compared with $5.30 per diluted share for the 2011 period, an increase of 12 percent. Revenues for the six-month period totaled $50.5 billion, a decrease of 2 percent (up 1 percent, adjusting for currency) compared with $51.3 billion for the six months of 2011.
Operating (non-GAAP) net income for the six months ended June 30, 2012 was $7.3 billion compared with $6.8 billion in the year-ago period, an increase of 9 percent. Operating (non-GAAP) diluted earnings per share were $6.29 compared with $5.50 per diluted share for the 2011 period, an increase of 14 percent.

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