Guidance and Analysis
International Business Machine’s (IBM) fourth-quarter 2009 results were upbeat with better-than-expected revenue, margins and profitability. IBM won a spectacular amount of new services contract signings and raised its earnings forecast for 2010.
We believe IBM’s high margin recurring revenue business and increase in profitability due to cost cuts and new contract wins will be the main driver of growth in 2010. Furthermore, IBM’s longer-term services deal could bring an upswing in its top-line growth, while growing demand for outsourcing services will boost near-term sales.
IBM’s results signify that corporate IT spending is picking up and the economy is improving. IBM has benefited from new initiatives such as Smarter Planet, Business Analytics and Optimization, and Cloud Computing giving a push to the next cycle of growth and productivity for its clients. These initiatives will benefit the company in 2010.
IBM’s full-year 2009 earnings of $10.01 per share were up 13% year over year, and net income of $13.4 billion rose 9% from fiscal year 2008 levels. Earnings for the year were a record, despite the worldwide recession. Full-year earnings surpassed the Zacks Consensus expectation of $9.88 per share as well as the company’s own guidance of $9.85 per share.
Historically, the company’s earnings have consistently surpassed the Zacks Consensus expectation and IBM has raised its guidance for almost every quarter in the last two years. For fiscal year 2010, the company now expects earnings of at least $11 per share, up from a previously expected $10-$11 per share range. For the first-quarter of 2010, management expects revenue to be in the $22.8 billion to $23 billion range, up 5% to 6% sequentially.
Fourth-Quarter Earnings
IBM’s quarterly earnings exceeded the Zacks Consensus estimate of $3.47 per share by 12 cents. As a result of expense management, net profit improved by 8.7% to $4.8 billion, while earnings per share rose 9.8% to $3.59. This compares to a profit of $4.4 billion or $3.27 per share in the year-ago period. Net margin increased 130 basis points year over year to 17.7%.
Profitability in the quarter was fueled by higher gross profit margin, which improved to 48.3% from 47.9% in the year-ago quarter led by improved margin in all of its segments, particularly, the Services, Financing and the Systems and Technology segments. IBM has benefited from the growing focus on high margin business like services and software. This has allowed the company to expand its gross margins in 21 out of the past 22 quarters. Moreover, the company benefited from lower interest expense, which fell 57.8% from the year-ago period.
IBM continued its cost-cutting initiatives, as a result of which fourth quarter operating expenses fell 11% year-over-year. SG&A expense decreased 4.7% to $5.6 billion and RD&E expense decreased 4.4% to $1.5 billion from the year-ago period.
Fourth-Quarter Revenue
Total revenue beat the Zacks Consensus estimates by $477.0 million. Revenue was up marginally by 0.8% (down 5.0% when adjusted for currency) to $27.2 billion from the year-ago quarter. Overall, sales were down in three of its five segments. Services and software revenue were higher, while hardware fell, though not as much as in the previous quarters.
Total Global Services revenue increased 2% year over year, driven by an increase of 4% in Global Technology Services, offset by a 3% decline in Global Business Services segment revenues. IBM reported an increase in signed services contracts, which rose to $18.8 billion, an increase of 9% from the year-ago period. The company signed 22 contracts, which were greater than $100 million. Signings in Consulting and Systems Integration and in Integrated Technology Services increased 1% while the company’s total outsourcing signings increased 15% to $11.4 billion. The estimated services backlog as on December 31 was $137 billion.
IBM reported improved revenue from its branded middleware products that include WebSphere, Information Management, Tivoli and Lotus products, which increased 6% year over year. As a result, the company’s Software segment increased 2% year over year in the quarter.
From a geographic perspective, revenue was down 3% in the North American region, but grew 2% in the EMEA. Revenue from OEM increased 5%, while revenues from the growth markets increased 14% and represented 20% of total geographic revenues.
Robust Cash Flow & Balance Sheet
IBM delivered $14.0 billion in total cash and marketable securities, compared to $11.5 billion in the previous quarter. The company reported cash flow from operations (excluding Global Financing receivables) of $8.4 billion, with free cash flow of $7.2 billion.
For the full year, IBM generated free cash flow of $15.1 billion, up more than $800 million from the year-ago period. IBM returned $10.3 billion to shareholders through $2.9 billion in dividends and $7.4 billion of share repurchases.
We remain optimistic on the company’s long-term growth and expect it to post stronger results in 2010. We advice stockholders to wait for a favorable exit point. Until then we remain Neutral on IBM.
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