Say Goodbye to IBM's American Success Story
But if IBM's earnings -- which were released last night -- highlight one thing, it's that Big Blue's days of being an American success story are over.
Sounds Dire? Don't Worry, It's Not.
IBM's past 100 years were not without faults, and the company still faces its fair share of risks moving forward. But IBM has learned from many of the mistakes made during the nadir of the early '90s and is on a high note right now.
In its first 100 years, IBM soldiered forward by dominating in America. During its next 100 years, IBM will be a story of global success.
Management has a laser-like focus on a bold plan to double profits by 2015. A big part of it depends on establishing a strong position in emerging markets.
While developed countries like Italy, Japan, and even the U.S. continue to extract themselves from the financial mess of 2008, developing countries like China, Brazil, India, and Russia are growing by leaps and bounds. While it's not always easy to profit from the tantalizing growth in these countries, Big Blue is finding a way.
To the Earnings!
The earnings headline for IBM is this: The company posted strong sales, and earnings tagged along nicely. Quarterly revenue was $26.7 billion, soundly beating analyst estimates of $25.4 billion. On the earnings front, IBM posted adjusted earnings of $3.09 per share. The earnings performance was strong enough that IBM raised its full-year operating earnings guidance to $13.25, a full $0.25 ahead of the level it targeted at the beginning of the year.
IBM continued to fire on all cylinders in the United States. That's important because the U.S. is still Big Blue's largest market. Within this home market, IBM notched a respectable 6% sales growth over last year.
However, as other developed countries like Japan and Europe struggled, up-and-coming emerging markets picked up the slack.
IBM's Emerging (Market) Ambitions
IBM saw sales leap forward by a currency-adjusted 13% in growth markets, with 21% growth in BRIC (Brazil, Russia, India, and China) markets. Overall, Big Blue saw greater than 10% growth in almost 40 expanding markets.
Best of all, the backlog of contracts for future work IBM has signed keeps getting bigger, and the increase is concentrated in fast-growing emerging markets. IBM now has 20% of its backlog in emerging markets, and growth market backlog is up 50% in the past two years. That growth rate in IBM's backlog of contracts shows that high growth rates in emerging markets isn't a passing trend. Overall, IBM wants 30% of its sales to come from these emerging markets by 2015.
Don't let the Currency Distract You
IBM's quarter won't offer investors many more clues. It was solid, though heavily aided by strong currency tailwinds that made results look better than their reality. However, what investors need to focus on with IBM is the long-term trend, of which this quarter is one small piece.
In 2010, IBM embarked on its aforementioned plan to double profits, reaching $20 per share by 2015. The plan was extremely ambitious, as IBM is a sprawling corporate giant: It's simply far too large to achieve outsized sales gains.
However, IBM is also the consummate professional of technology -- the big brother of an industry full of reckless showmen who hoard shareholder capital, make wild accusations, and engage in petty feuds with one another.
The IBM Way of the Future
As the antithesis to these ills that attend technology firms, IBM created a plan that focuses on very un-technology areas like prudent share buybacks and acquisitions in higher-margin software and services, targeting a few key technologies like business analytics and cloud computing, and growth in emerging markets to hit modest revenue gains while delivering outsized earnings gains to investors.
I know -- such a notion of disciplined financial management in technology is practically heresy, but it's the IBM way. Compared with those of its peers, IBM's MO is both painstakingly boring and brilliant. So, if you're confused by investors cheering wildly as IBM raises its operating earnings target for the year by a mere 2%, while other technology high-flyers wildly rise and fall, it's because IBM's consistency is to be applauded.
We cheer because IBM was prescient enough to move aggressively into software and services while pawning off capital-intensive boondoggles like PCs on un-witting peers.
We cheer because the company is so excellently capturing the emerging market opportunity.
We cheer because IBM doesn't need to blow out earnings; merely hitting its target of doubling profits by 2015 would be a monumental achievement.
Motley Fool analyst Eric Bleeker owns shares of no companies listed above. The Motley Fool owns shares of Microsoft, IBM, and Apple. Motley Fool newsletter services have recommended buying shares of Apple and Microsoft and creating a bull call spread position in Apple.