IBM’s earnings smashed expectations as margin upside offset weaker revenues, and the firm significantly raised guidance for 2009.
Revenues fell 13.3% to $23.25 billion from a year ago, but only declined 7% when excluding currency effects. With the exception of software, every business segment saw revenues decline versus last year. Hardware sales, which declined 26% from a year ago, and short-term consulting also showed considerable weakness. All geographic areas saw revenue decline, with the Americas down 9%, Europe/Middle East/Africa down 20%, and Asia-Pacific down 7%.
These sales results along with management’s commentary suggest that businesses are not prepared to resume spending.
Although revenues disappointed, the Street totally underestimated IBM’s cost efficiencies. Gross profit margin was 45.5% in the quarter compared to 43.2% last year, and pretax profit margin rose 4.1 percentage points to 18.3% – a level normally reserved for the seasonally strongest fourth quarter. Margin improvement was driven by a more profitable business mix – particularly with software and consulting contracts – and dramatically lower costs from aggressive restructuring and improved labor productivity.
Really juicing investors was the upside guidance from IBM, saying they expect earnings of “at least $9.70” per share. IBM previously expected $9.20 per share while the consensus estimate currently stands at $9.15.
IBM’s business recovery may be more muted than other, more cyclical companies. Still, IBM’s improved signings in the service business, their largest segment, and a near-record backlog bode well for the company’s prospects.
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Peter J. Lazaroff
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