Shares of International Business Machines Corp. (IBM) surged 4.11% ($8.06) in after-hours trading on the heels of strong fourth quarter earnings, which beat the Zacks Consensus Estimate by 14 cents per share (2.7%).
After two consecutive misses, IBM’s fourth quarter revenue of $29.30 billion succeeded in beating the Zacks Consensus Estimate of $29.18 billion. However, revenue declined 1% from the year-ago quarter. Adjusting for favorable foreign currency, revenue growth was almost flat on a year-over-year basis in the reported quarter. Revenue jumped 18.4% on a sequential basis.
Software was the only segment that witnessed year-over-year growth in the quarter. Revenue climbed 3.5% year over year (up 4% due to favorable foreign currency) and 37.3% sequentially to $7.92 billion. Revenue from IBM’s middleware products (WebSphere, Information Management, Tivoli, Lotus and Rational products) increased 5.0% year over year, while operating system revenue remained flat on a year-over-year basis.
Services revenue decreased 2.1% year over year but increased 3.7% sequentially to $15.00 billion. Global technology services revenue fell 1.6% from the year-ago quarter but climbed 3.6% from the third quarter to $10.28 billion. Global business services revenue was $4.72 billion, down 3.2% from the year-ago quarter but up 3.9% on a sequential basis. Backlog at the end of fourth quarter remained flat at $140.0 billion.
Total outsourcing revenue decreased 3.0% year over year, while transactional revenue also declined 1.0% year over year in the quarter. GTS outsourcing declined 3% from the year-ago quarter, while GBS outsourcing plunged 4.0% year over year in the reported quarter.
Total signings amounted to $17.9 billion during the quarter, down 12.0% on a year-over-year basis. Outsourcing signings plunged 28% year over year to $8.3 billion, while transactional increased 9.0% from the year-ago quarter to $9.5 billion. Outsourcing backlog declined 3% year over year to $89.0 billion at the end of the last quarter.
Hardware/System & Technology revenue declined a modest 1.0% year over year but surged 48.0% quarter over quarter to $5.76 billion. Excluding the negative impact from the divestiture of Retail Store Solutions (“RSS”), revenue increased 4.0% from the comparable prior-year quarter. Revenue in the growth markets soared 68% year over year in the fourth quarter.
Systems revenue except RSS increased 4.0%, primarily due to a 56.0% year-over-year jump in System z revenues. This fully offset weak performance from Power Systems, System X and Storage, which were down 19%, 2% and 5%, respectively. Revenue from Microelectronics OEM increased 4% year over year in the reported quarter.
Global Financing revenue declined 2.4% year over year but increased 13.3% sequentially to $535.0 million in the reported quarter.
Region wise, revenue grew only in Asia-Pacific, up 4.0% (5.0% including favorable currency) year-over-year to $7.0 billion. Revenue from Americas (“US and Canada”) was flat year over year (up 1.0% including favorable currency) at $12.5 billion. Revenue from Europe/Middle East/Africa declined 5.0% (down 3.0% including favorable currency) from the year-ago quarter to $9.1 billion.
Revenue from IBM’s growth markets increased 7.0%. IBM continued to witness strong growth from BRIC (Brazil, Russia, India & China) countries, which were up 11% year over year (14% including favorable impact of foreign currency) in the reported quarter.
Gross profit on a non-GAAP basis increased 3.6% year over year and 28.9% sequentially to $15.33 billion. However, gross margin expanded 210 basis points (“bps”) from the year-ago quarter and 420 bps from the previous quarter. The improvement in gross margin was primarily driven by favorable revenue mix and productivity improvements.
Total operating expense & other income decreased 2.3% from the year-ago quarter but increased 13.2% sequentially to $7.22 billion. The year-over-year decline was primarily due to lower selling, general & administrative expense (SG&A) (down 3.3% year over year). Sequentially, both SG&A and research & development expense (R&D) increased in the reported quarter.
Higher gross margin base and lower-than-expected increase in operating expenses drove pre-tax income, which jumped 9.5% year over year and 47.0% from the previous quarter to $8.11 billion in the fourth quarter. Pre-tax margin increased 250 bps from the year-ago quarter and 540 bps sequentially to 27.7% in the reported quarter.
Net profit on a non-GAAP basis increased 9.5% year over year and 47.5% sequentially to $6.13 billion in the reported quarter. Earnings per share (“EPS”) jumped 14.4% from the year-ago quarter and 48.9% from the previous quarter to $5.39. Earnings growth was driven by margin expansion (47 cents) and aggressive share repurchase (24 cents), which fully offset weak revenue growth (negative impact of 3 cents).
Balance Sheet & Cash Flow Details
IBM ended the quarter with $11.13 billion in total cash and marketable securities, compared with $12.25 billion in the previous quarter. At the end of the fourth quarter, total debt was $33.27 billion compared with $33.67 billion in the prior quarter.
IBM reported cash flow from operations (excluding Global Financing receivables) of $10.50 billion versus $4.19 billion in the previous quarter. In the reported quarter, IBM generated free cash flow of $9.52 billion, significantly up from $3.14 billion in the prior quarter.
IBM forecasts fiscal 2013 operating earnings of at least $16.70 per share, an estimated 9.5% increase from $15.25 reported in 2012. IBM continues to expect effective tax-rate to be around 25% for 2013.
Although IBM reported a better-than-expected fourth quarter, revenue growth was disappointing. We expect software to grow strongly in the near term, although stiff competition from Oracle remains a concern. However, sluggish growth in the services and hardware segment makes us cautious on the stock.
Moreover, volatile macro-economic environment, continued weakness in the domestic market and Euro zone, declining outsourcing signings and increasing competition from other outsourcing service providers such as Accenture (ACN) are the major headwinds in the near term.
Currently, IBM has a Zacks Rank #4 (Sell).Read the Full Research Report on ACN
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