Arik Hesseldahl

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IBM Raises 2013 Outlook on Better Than Expected Q2 Results

eyebeeem-featureQuarterly earnings results from computing and IT services giant IBM just crossed the wires, and they’re better than what analysts expected. Shares rose by more than two percent after hours as the results were made public.

Earnings on a per-share basis were $3.91 on sales of $24.9 billion, which was better than the consensus view of analysts, who called for Big Blue to report EPS of $3.77 on sales of $25.4 billion. IBM also raised its full-year earnings forecast to $16.90 a share, up from $16.70 previously, which apparently is what is making shareholders so happy. At least part of that came from cost reductions that included layoffs. IBM said it took a $1 billion charge during the quarter to cover reorganization costs.

Here’s IBM’s full announcement.

IBM Reports 2013 Second-Quarter Results

ARMONK, N.Y.–(BUSINESS WIRE)–IBM (NYSE: IBM)

Raises 2013 Operating EPS Expectation by $0.20 to $16.90, Excluding $1 Billion Second-Quarter Workforce Rebalancing Charge

IBM (NYSE: IBM) today announced second-quarter 2013 diluted earnings of $2.91 per share, compared with diluted earnings of $3.34 per share in the second quarter of 2012, a decrease of 13 percent. Operating (non-GAAP) diluted earnings were $3.22 per share, including workforce rebalancing charges, compared with operating diluted earnings of $3.51 per share in the second quarter of 2012, a decrease of 8 percent. Operating (non-GAAP) diluted earnings per share were $3.91, an increase of 8 percent, excluding the impact of workforce rebalancing charges.

Second-quarter net income was $3.2 billion compared with $3.9 billion in the second quarter of 2012, a decrease of 17 percent. Operating (non-GAAP) net income was $3.6 billion, including workforce rebalancing charges, compared with $4.1 billion in the second quarter of 2012, a decrease of 12 percent. Operating (non-GAAP) net income, excluding the impact of workforce rebalancing, was $4.3 billion, an increase of 3 percent.

Total revenues for the second quarter of 2013 of $24.9 billion were down 3 percent (down 1 percent, adjusting for currency) from the second quarter of 2012.

“In the second quarter, we delivered strong performance in our higher-value software and mainframe businesses and again significantly increased our services backlog on growth in new business,” said Ginni Rometty, IBM chairman, president and chief executive officer.

“Going forward, we will continue investing in our strategic growth initiatives, acquiring and divesting capabilities, re-balancing skills and taking action in the areas that are not performing. We expect continued improvement through the second half of the year and remain confident that we will achieve our increased 2013 operating EPS expectation of at least $16.90, excluding the $1 billion workforce rebalancing charge in the second quarter.”

Second-Quarter GAAP – Operating (non-GAAP) Reconciliation

Second-quarter operating (non-GAAP) diluted earnings exclude $0.31 per share of charges: $0.15 per share for the amortization of purchased intangible assets and other acquisition-related charges, and $0.16 per share for retirement-related charges driven by changes to plan assets and liabilities primarily related to market performance.

Full-Year 2013 Expectations

The company said that a substantial second-half gain that it was expecting in its prior view of earnings per share will not likely be achieved the end of 2013. As a result, the company updated its prior full-year EPS expectations, including the impact of a second-quarter $1 billion workforce rebalancing charge, to at least $16.25, with the net impact of $0.45 driven by the elongated discussions for its larger divestiture project. IBM’s full-year 2013 EPS expectations are as follows:

Full-year GAAP diluted earnings per share expectations are at least $15.08. Operating (non-GAAP) diluted earnings per share expectations are being raised to at least $16.90, excluding the second-quarter $1 billion workforce rebalancing charge. Operating (non-GAAP) earnings per share expectations are at least $16.25, including the second-quarter $1 billion workforce rebalancing charge.

The 2013 operating (non-GAAP) earnings expectations exclude $1.17 per share of charges for amortization of purchased intangible assets, other acquisition-related charges, and retirement-related charges.

Geographic Regions

The Americas’ second-quarter revenues were $10.7 billion, a decrease of 3 percent (down 3 percent, adjusting for currency) from the 2012 period. Revenues from Europe/Middle East/Africa were flat at $7.8 billion (down 1 percent adjusting for currency). Asia-Pacific revenues decreased 8 percent (flat, adjusting for currency) to $5.8 billion. OEM revenues were $538 million, up 5 percent (up 6 percent adjusting for currency) compared with the 2012 second quarter.

Growth Markets

Revenues from the company’s growth markets were flat (up 1 percent, adjusting for currency). Revenues in the BRIC countries — Brazil, Russia, India and China — were flat (up 1 percent, adjusting for currency).

Services

Global Technology Services segment revenues decreased 5 percent (down 2 percent, adjusting for currency) to $9.5 billion. Global Business Services segment revenues were down 1 percent (up 2 percent, adjusting for currency) to $4.6 billion.

Pre-tax income from Global Technology Services decreased 14 percent and pre-tax margin decreased to 15.4 percent. Pre-tax income from Global Technology Services increased 3 percent and pre-tax margin increased to 19.0 percent, excluding the impact of workforce rebalancing. Global Business Services pre-tax income decreased 22 percent and pre-tax margin decreased to 13.0 percent. Global Business Services pre-tax income increased 2 percent and pre-tax margin increased to 17.9 percent, excluding the impact of workforce rebalancing.

The estimated services backlog at June 30 was $141 billion, up 3 percent year over year at actual rates (up 7 percent, adjusting for currency).

Software

Revenues from the Software segment were $6.4 billion, up 4 percent (up 5 percent, adjusting for currency) compared with the second quarter of 2012. Software pre-tax income decreased 2 percent and pre-tax margin decreased to 34.1 percent. Software pre-tax income increased 6 percent and pre-tax margin increased to 37.2 percent, excluding the impact of workforce rebalancing.

Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Social Workforce Solutions (formerly Lotus) and Rational products, were $4.3 billion, up 9 percent (up 10 percent, adjusting for currency) versus the second quarter of 2012. Operating systems revenues of $606 million were down 4 percent (down 2 percent, adjusting for currency) compared with the prior-year quarter.

Revenues from the WebSphere family of software products increased 9 percent year over year. Information Management software revenues increased 5 percent. Revenues from Tivoli software increased 13 percent. Revenues from Social Workforce Solutions increased 22 percent, and Rational software increased 12 percent.

Hardware

Revenues from the Systems and Technology segment totaled $3.8 billion for the quarter, down 12 percent (down 11 percent, adjusting for currency) from the second quarter of 2012. Excluding Retail Store Solutions (RSS), revenues were down 8 percent (down 7 percent adjusting for currency). Systems and Technology pre-tax income decreased $375 million. Systems and Technology pre-tax income decreased $199 million, excluding the impact of workforce rebalancing.

Total systems revenues, excluding RSS, decreased 10 percent (down 9 percent, adjusting for currency). Revenues from Power Systems were down 25 percent compared with the 2012 period. Revenues from System x were down 11 percent. Revenues from System z mainframe server products increased 10 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), increased 23 percent. Revenues from System Storage decreased 7 percent. Revenues from Microelectronics OEM increased 6 percent.

Financing

Global Financing segment revenues decreased 6 percent (down 4 percent, adjusting for currency) in the second quarter at $487 million. Pre-tax income for the segment increased 4 percent to $550 million, excluding the impact of workforce rebalancing, pre-tax income increased 5 percent to $552 million.

Gross Profit

The company’s total gross profit margin was 48.7 percent in the 2013 second quarter compared with 47.6 percent in the 2012 second-quarter period. Total operating (non-GAAP) gross profit margin was 49.7 percent in the 2013 second quarter compared with 48.2 percent in the 2012 second-quarter period, with increases in Global Technology Services, Global Business Services, Software and Global Financing.

Expense

Total expense and other income increased 12 percent to $8.0 billion compared with the prior year period. Total expense and other income was $7.0 billion, excluding the impact of workforce rebalancing. S,G&A expense of $6.7 billion increased 14 percent year over year. S,G&A expense was $5.7 billion, excluding the impact of workforce rebalancing. R,D&E expense of $1.5 billion decreased 2 percent compared with the year-ago period. Intellectual property and custom development income decreased to $247 million compared with $289 million a year ago. Other (income) and expense was income of $91 million compared with prior-year income of $132 million. Interest expense decreased to $98 million compared with $117 million in the prior year.

Total operating (non-GAAP) expense and other income increased 11 percent to $7.8 billion compared with the prior-year period. Total operating (non-GAAP) expense and other income was $6.8 billion, excluding the impact of workforce rebalancing. Operating (non-GAAP) S,G&A expense increased 14 percent to $6.5 billion compared with the prior-year period. Operating (non-GAAP) S,G&A expense, excluding the impact of workforce rebalancing, was $5.5 billion. Operating (non-GAAP) R,D&E expense of $1.5 billion was down 4 percent compared with the year-ago period.

Pre-Tax Income

Pre-tax income decreased 20 percent to $4.1 billion and pre-tax margin of 16.6 percent was down 3.4 points compared with the prior-year period. Operating (non-GAAP) pre-tax income decreased 16 percent to $4.6 billion and pre-tax margin was 18.4 percent, down 2.7 points. Operating (non-GAAP) pre-tax income, excluding the impact of workforce rebalancing, was $5.6 billion.

***

IBM’s tax rate was 22.1 percent, down 2.7 points year over year; operating (non-GAAP) tax rate was 22.0 percent, down 3.0 points compared to the year-ago period.

Net income margin decreased 2.1 points to 12.9 percent. Total operating (non-GAAP) net income margin decreased 1.5 points to 14.4 percent. Total operating (non-GAAP) net income margin, excluding the impact of workforce rebalancing, was 17.4 percent.

The weighted-average number of diluted common shares outstanding in the second-quarter 2013 was 1.11 billion compared with 1.16 billion shares in the same period of 2012. As of June 30, 2013, there were 1.10 billion basic common shares outstanding.

Debt, including Global Financing, totaled $34.1 billion, compared with $33.3 billion at year-end 2012. From a management segment view, Global Financing debt totaled $24.9 billion versus $24.5 billion at year-end 2012, resulting in a debt-to-equity ratio of 7.2 to 1. Non-global financing debt totaled $9.3 billion, an increase of $0.5 billion since year-end 2012, resulting in a debt-to-capitalization ratio of 39.1 percent from 36.1 percent.

IBM ended the second-quarter 2013 with $10.4 billion of cash on hand and generated free cash flow of $2.7 billion, excluding Global Financing receivables, down approximately $1.0 billion year over year. The company returned $4.6 billion to shareholders through $1.0 billion in dividends and $3.6 billion of share repurchases.

Year-To-Date 2013 Results

Net income for the six months ended June 30, 2013 was $6.3 billion compared with $6.9 billion in the year-ago period, a decrease of 10 percent. Diluted earnings per share were $5.60 compared with $5.95 per diluted share for the 2012 period, a decrease of 6 percent. Revenues for the six-month period totaled $48.3 billion, a decrease of 4 percent (down 2 percent, adjusting for currency) compared with $50.5 billion for the six months of 2012.

Operating (non-GAAP) net income for the six months ended June 30, 2013 was $7.0 billion compared with $7.3 billion in the year-ago period, a decrease of 5 percent. Operating (non-GAAP) net income, excluding the impact of second-quarter workforce rebalancing charges, was $7.7 billion. Operating (non-GAAP) diluted earnings per share were $6.23 compared with $6.29 per diluted share for the 2012 period, a decrease of 1 percent. Operating (non-GAAP) diluted earnings per share, excluding the impact of second-quarter workforce rebalancing charges, was $6.90 per share, an increase of 8 percent.


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