Monday, October 17, 2011

IBM Reports Improved Quarterly Performance (Charts, Video) *Net Income & EPS Increase; Revenues Dip* IBM

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IBM reported Q3 2011 financial results on October 17, 2011
*Charts and commentary have been updated for IBM Q3 2011 financial results*

IBM Reports Improved Quarterly Performance: Net Income, EPS Increase; Revenues Dip

IBM Summary Q3 2011 Financial performance improved in Q2 2011 from the prior quarter and prior year, except for total revenues QoQ. This decrease in total revenues creates some uncertainty as Q3 is usually the second best quarter in the annual cycle, behind Q4. Operating income, net income, earnings per share, cash flow per share, gross margin, operating margin, and net margin all increased QoQ. Debt increased above the historical range at 27.38% of total assets. This quarter, the Q3, is typically a rebound from Q2, the second weakest cyclical quarter for IBM after Q1. Q3 is normally stronger and Q4 is the annual cyclical peak. IBM raised full-year guidance (see below). IBM has a large, embedded product financing operation which results in lower financial performance than other technology companies. Financial position continues as acceptable, with adequate capital, moderate debt, and adequate liquidity.

IBM Income Statement Q3 2011 IBM reported total revenues of $26.17 billion, net income of $3.84 billion, and earnings per share of $3.23. From the prior quarter Q2 2011, total revenues were down -1.88%, net income up +4.83%, and earnings per share up +7.67%. From the prior year Q3 2010, these were up +7.80%, up +7.08%, and up +14.54%, respectively. Gross margin, operating margin, and net margin were up at 46.52%, 20.11%, and 14.69%, respectively. Cash flow from operations of $3.94 was up QoQ and YoY. The operating expense ratio (operating expenses divided by total revenues) of 26.41% decreased QoQ and YoY.

IBM Balance Sheet Q3 2011 IBM's total assets decreased -2.92% QoQ and increased YoY +2.79% to $110.16 billion from the prior record quarter of $113.47 billion. The capital to assets ratio (total stockholders' equity divided by total assets) of 20.31% is adequate and about the historical average. The current ratio (current assets divided by total assets) of 41.19% is within the historical range. The return on assets of +14.02% is above average and continues the uptrend. Total debt at 27.38% of total assets is above the historical average.

IBM Outlook: Full Year 2011 Expectations IBM raised its expectations for full-year 2011 GAAP diluted earnings per share to at least $12.95 from at least $12.87; and operating (non-GAAP) diluted earnings per share to at least $13.35 from at least $13.25. The 2011 operating (non-GAAP) earnings exclude $0.40 per share of charges for amortization of purchased intangible assets, other acquisition-related charges, and retirement-related items driven by changes to plan assets and liabilities primarily related to market performance.

IBM Financial Performance by the Quarters (Charts)

IBM Earnings Per Share Below is a chart of quarterly earnings per share. Current Earnings per Share of $3.23 are up +7.67% QoQ and up +14.54% YoY. The recent peak was Q4 2010 of $4.18. The recent low has been $2.31 in Q1 2011. There is a marked cycle to IBM EPS with lows in Q1 and highs in Q4. Both the lows and highs have been increasing. The chart average EPS is $2.73.

IBM Cash Flow per Share Below is a chart of quarterly cash flow from operations per share. Current Cash Flow per Share of $3.94 is above average and a 3-quarter high. The peak was $5.40 in Q4 2010. The low was $2.90 in Q2 2010. As with the Earnings per Share above, there is a marked cycle to IBM CFS with lows in Q1 and/or Q2 and highs in Q4. The chart average CFS is $3.75.

IBM Total Revenues, Operating Income, and Net Income Below is a chart of quarterly total revenues, operating income, and net income. Current Total Revenues of $26.17 billion is above average, but down -1.88% QoQ and up +7.80% YoY. Total Revenues have generally been increasing, with dips in Q1, so the Q3 dip is of concern. Current Operating Income of $5.26 billion is above average and increased for the 3rd consecutive quarter. Current Net Income of $3.84 billion is above average and is up +4.83% QoQ and up +7.08% YoY. The chart averages for TR, OI, and NI are $25.35 billion, $4.92 billion, and $3.69 billion.

IBM Gross Margin, Operating Margin, and Net Margin Below is a chart of quarterly gross margin, operating margin, and net margin. Current Gross Margin of 46.52% is slightly above average and the same as the prior quarter. Current Operating Margin of 20.11% is slightly above average and an increase QoQ. Current Net Margin of 14.69% is slightly above average and an increase QoQ. The chart averages for GM, OM, and NM are 46.00%, 19.60%, and 14.44%. The current average income tax rate of 23.61% is below the historical average.

IBM Return on Assets Below is a chart of annual return on average assets per quarter. The total net income for the most recent 4 quarters is divided into average assets for the most recent 4 quarters to obtain a rolling annualized ROA, an annualized return on average assets for the 12 months (4 quarters) ended. Current Return on Assets of 14.02% is historically above average and continues an impressive uptrend. Return on Assets has been steadily increasing. The chart average ROA is 13.41%.

IBM Growth Rates Below is a chart of the annual (YoY, Y/Y, annual change) growth rates for total revenues and earnings per share. Current Total Revenues Growth Rate of +7.80% is above average. Current Earnings per Share Growth Rate of +14.54% is slightly below average. The chart averages for TRGR and EPSGR are +4.30% and +15.13%, respectively.

IBM Revenue Sources Below is a chart of quarterly revenue sources, as a percentage of total revenues. Global Technology Services at 38.05% is the historical leader with a chart average of 37.61% of total revenues. Software at 23.68% continues as the second highest source with a chart average of 23.02%. Global Business Services at 17.99% and Systems and Technology at 16.71% are next with chart averages of 18.14% and 17.60%, respectively. Global Financing at 3.57% comprises the remainder with a chart average of 3.62%.

IBM Geographic Revenues Below is a chart of quarterly geographic revenues, as a percentage of total revenues. Americas at 41.69% is the historical leader with a chart average of 42.02% of total revenues. Europe, Middle East, Africa at 30.60% continues as the second highest source with a chart average of 32.94%. Asia Pacific at 24.86% is third with a chart average of 22.49%. OEM at 2.84% comprises the remainder with a chart average of 2.55%.

IBM Operating Expense Ratio Below is a chart of quarterly operating expense ratio, which is operating expenses divided by total revenues. There is a pronounced annual cycle with the top in Q1 and the low in Q4. The current Operating Expense Ratio of 26.41% is below the historical average. This indicates a increased efficiency plus a higher proportion of revenues is reaching the bottom line, net income and ultimately earnings per share. The chart average OER is 27.03%.

IBM Reports 2011 Third Quarter Results

ARMONK, N.Y., October 17, 2011 . . . IBM (NYSE: IBM) today announced third-quarter 2011 diluted earnings of $3.19 per share, compared with diluted earnings of $2.82 per share in the third quarter of 2010, an increase of 13 percent. Operating (non-GAAP) diluted earnings were $3.28 per share, compared with operating diluted earnings of $2.85 per share in the third quarter of 2010, an increase of 15 percent.

Third-quarter net income was $3.8 billion compared with $3.6 billion in the third quarter of 2010, an increase of 7 percent. Operating (non-GAAP) net income was $4.0 billion compared with $3.6 billion in the third quarter of 2010, an increase of 9 percent.

Total revenues for the third quarter of 2011 of $26.2 billion increased 8 percent (3 percent, adjusting for currency) from the third quarter of 2010.

"In the third quarter, we drove revenue growth, margin expansion and increased earnings as a result of our innovation-based strategy and continued investment in growth initiatives," said Samuel J. Palmisano, IBM chairman, president and chief executive officer. “Growth markets delivered outstanding revenue performance across software, hardware, and services and contributed to the company's expanded margins. We also achieved strong results in Smarter Planet, business analytics and cloud.

"Based on this performance, we are raising our 2011 full-year operating earnings per share expectations to at least $13.35."

About IBM

The company's business model is built to support two principal goals: helping clients succeed in delivering business value by becoming more innovative, efficient and competitive through the use of business insight and information technology (IT) solutions; and, providing long-term value to shareholders. The business model has been developed over time through strategic investments in capabilities and technologies that have the best long-term growth and profitability prospects based on the value they deliver to clients. The company's strategy is to focus on the high-growth, high-value segments of the IT industry.

The company's global capabilities include services, software, hardware, fundamental research and financing.

The broad mix of businesses and capabilities are combined to provide business insight and solutions for the company's clients.

The business model is flexible, and allows for periodic change and rebalancing. The company has exited commoditizing businesses like personal computers and hard disk drives, and strengthened its position through strategic investments and acquisitions in emerging higher value segments like service oriented architecture (SOA) and Information on Demand. In addition, the company has transformed itself into a globally integrated enterprise which has improved overall productivity and is driving investment and participation in the world's fastest growing markets. As a result, the company is a higher performing enterprise today than it was several years ago.

The business model, supported by the company's long-term financial model, enables the company to deliver consistently strong earnings, cash flows and returns on invested capital in changing economic environments..

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