IBM Quarterly Earnings Analysis: By the Numbers

The 96-rack IBM Blue Gene Q Sequoia supercomputer at Lawrence Livermore National Laboratory April 25, 2013 in Livermore, CA. The
The 96-rack IBM Blue Gene Q Sequoia supercomputer at Lawrence Livermore National Laboratory - one of the fastest computers in the world.

International Business Machines (IBM) just reported its preliminary financial results for the quarter that ended Sept. 30, based upon which we provide a unique corporate earnings release based analysis of its performance. Our analysis focuses on the company's performance for the same quarterly period on a year-on-year basis (unless stated otherwise).

This earnings release follows the earnings announcements from the following peers of International Business Machines Corporation: SAP AG (SAP).


  • Summary numbers: Revenues of $22.397 billion, Net Earnings of $3.455 billion and EPS of $0.02. Performance focus more on top-line than bottom-line: same period year-on-year change of revenue of -5.58% vs. change in earnings of -14.50%.
  • Gross margins now 48.55% from 52.36% compared to the same period last year, EBITDA margins now 18.93% from 24.27%
  • Earnings decline from operating margin decreases as well as from unusual items
The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):
Revenue Growth (Qtr YOY)-4.15-5.48-3.95-2.25-5.58
Earnings Growth (Qtr YOY)5.676.02-21.3728.24-14.50
Net Margin17.0422.3310.6016.9815.43
Return on Equity85.32115.2248.0896.6286.62
Return on Assets13.8720.277.6613.4011.36
Revenue Growth Versus Earnings Growth

Companies sometimes focus on growing their top-line (Sales or Revenues) more than their bottom-line i.e. Earnings or Net Income. Investors should look at revenue growth to understand a company's ability to grow its market share, and earnings growth to look at the company's ability to generate returns. Comparing revenue growth to earnings growth helps understand a couple of items: (1) A company's focus on gaining market share vs. generating profits and (2) How additive or dilutive the revenue performance has been to earnings.IBM-US's year-on-year change in top line compared to the same period last year of -5.58% is better than its change in earnings which was -14.50% - suggesting perhaps that the company's focus is on the top-line at the expense of bottom-line earnings. But more critically, this top-line performance is among the lowest thus far in its sector - inviting the potential of loss in market share as well this period. Also, for comparison purposes, revenues changed by -8.07% and earnings by -16.49% compared to the immediate last quarter.
Earnings Growth Analysis

The company's year-on-year decline in earnings has been influenced by the following factors: (1) Decline in gross margins from 52.36% to 48.55% and (2) issues with cost controls. As a result, operating margins (EBITDA margins) went from 24.27% to 18.93% in this period. For comparison, gross margins were 53.54% and EBITDA margins 24.89% in the immediate last quarter.
Gross Margin Trend

Companies sometimes tradeoff for improvements in revenues and margins by extending friendlier terms to customers and vendors. One quick way to check against such activity is to compare the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is quite possible that the company's performance is a result of truly delivering in the marketplace and not simply a prop up using the balance sheet.The company's decline in gross margins is offset by some improvements on the balance sheet side -- working capital management shows progress. The company's working capital days have gone down to 21.55 from 29.13 for the same period last year and suggests that the gross margin decline is not altogether bad.
Unusual Items

The company's decline in earnings has been influenced by the following factors: (1) Decline in EBIT margins from 19.32% to 18.93% and (2) unusual items that decreased pretax margins from 20.28% to 19.47%
EPS Growth Versus Earnings Growth

IBM's year-on-year change in Earnings per Share (EPS) of -99.46% is less than its change in earnings of -14.50%. This lower EPS growth suggests a likely larger dilution in the company's shares this period. Moreover, the change in earnings is less than the average among the declared results thus far in its peer group suggesting that the company is losing ground in generating profits in this group.
Supporting Data

The table below shows the preliminary results along with the recent trend for revenues, net income and other relevant metrics:
Revenue Growth (Qtr YOY)-4.15-5.48-3.95-2.25-5.58
Peer Average Revenue Growth (Qtr YOY)2.100.491.442.66-1.28
Earnings Growth (Qtr YOY)5.676.02-21.3728.24-14.50
Peer Average Earnings Growth (Qtr YOY)18.1015.83-7.274.56-0.69
Operating Cash Flow3760.006528.003326.003580.003904.00
Peer Average Operating Cash Flow2257.203809.073273.321945.322266.14
Operating Cash Flow Growth (Qtr YOY)13.43-26.18-18.2613.27N/A
Peer Average Operating Cash Flow Growth (Qtr YOY)27.18-3.63-7.301.76-11.77
Gross Margin52.3655.7351.5653.5448.55
Peer Average Gross Margin63.7667.0662.2564.1762.17
EBITDA Margin24.2728.6321.1224.8918.93
Peer Average EBITDA Margin29.9135.7323.7427.7726.75
Net Margin17.0422.3310.6016.9815.43
Peer Average Net Margin17.9424.0912.5215.2018.06
Working Capital Days29.1332.0436.6223.6221.55
Peer Average Working Capital Days29.1319.2034.4822.2516.96
Peer Average EPS2.273.621.452.380.49
EPS Growth (Qtr YOY)10.5111.70-15.1941.58-99.46
Peer Average EPS Growth (Qtr YOY)20.4018.45-4.4011.34-43.86
Return on Equity85.32115.2248.0896.6286.62
Peer Average Return on Equity53.1174.6630.5455.1153.64
Return on Assets13.8720.277.6613.4011.36
Peer Average Return on Assets12.5019.807.5910.5711.73
Company Profile

International Business Machines Corp. is an information technology company, which provides integrated solutions that leverage information technology and knowledge of business processes. The company operates its business through five segments: Global Technology Services, Global Business Services, Software, Systems & Technology and Global Financing. The Global Technology Services segment primarily provides Information Technology (IT) infrastructure and business process services, creating business value for clients through unique technology and IP integrated services within its global delivery model. Its capabilities include Strategic Outsourcing Services, Global Process Services, Integrated Technology Services, Cloud Services and Technology Support Services. The Strategic Outsourcing Services delivers comprehensive IT outsourcing services dedicated to transforming clients' existing infrastructures to consistently deliver improved quality, flexibility, risk management and financial value. The Global Process Services delivers a range of offerings consisting of standardized through transformational solutions including processing platforms and business process outsourcing. The Integrated Technology Services delivers a portfolio of project-based and managed services that enable clients to transform and optimize their IT environments by driving efficiency, flexibility and productivity, while reducing costs. The Cloud Services delivers a comprehensive set of cloud services ranging from assisting clients with building their own private clouds, to building customized dedicated managed clouds, to allowing clients to leverage standardized cloud infrastructure services from the Soft-Layer and SmartCloud Enterprise+ offerings, to creating hybrid environments linking their private and public workloads together. The Technology Support Services delivers a complete line of support services from product maintenance through solution support to maintain and improve the availability of clients' IT infrastructures. The Global Business Services segment delivers predictable business outcomes to the company's clients across two primary business areas: Consulting and Application Management Services. The Consulting delivers client value with solutions in Strategy and Transformation, Application Innovation Services, Enterprise Applications and Smarter Analytics. Consulting is also focused on bringing to market client solutions that drive Front Office Digitization in Smarter Commerce, Cloud, Mobile and Social Business. The Application Management Services provides application management, maintenance and support services for packaged software, as well as custom and legacy applications. The Software segment primarily consists of middleware and operating systems software. Middleware software enables clients to integrate systems, processes and applications across a standard software platform. Its capabilities include WebSphere Software, Information Management Software, Watson Solutions, Tivoli Software, Social Workforce Solutions, Rational Software and Mobile Software. The WebSphere Software delivers capabilities that enable organizations to run high-performance business applications. With these applications, clients can integrate and manage business processes across their organizations with the flexibility and agility they need to respond to changing conditions. The Information Management Software enables clients to integrate, manage and analyze enormous amounts of data from a large variety of sources in order to gain competitive advantage and improve their business outcomes. The Watson Solutions includes, Information Management Software, Watson is the first commercially available cognitive computing platform that has the ability to interact in natural language, processing vast amounts of big data, and learning from its interactions with people and computers. The Tivoli Software helps clients optimize the value they get from their infrastructures and technology assets through greater visibility, control and automation across their end-to-end business operations. The Social Workforce Solutions enables businesses to connect people and processes for more effective communication and increased productivity through collaboration, messaging and social networking software. The Rational Software supports software development for both IT and complex embedded system solutions, with a portfolio of products and solutions supporting DevOps and Smarter Product Development, transforming the way lines of business, development and operations work together to deliver innovation via software. The Mobile Software spans middleware and offers customers true end-to-end mobile solutions across platform and application development, mobile security, and mobile device management. The Systems & Technology segment provides clients with business solutions requiring advanced computing power and storage capabilities. It also provides semiconductor technology, products and packaging solutions to clients and for IBM's own advanced technology needs. Its capabilities include Systems, Storage and Microelectronics. The Systems business provides a range of general purpose and integrated systems designed and optimized for specific business, public and scientific computing needs. The storage products and solutions allow clients to retain and manage rapidly growing, complex volumes of digital information. The Microelectronics engages in semiconductor design and manufacturing business primarily for use in IBM systems and storage products, as well as delivering semiconductors and related services to external clients. The Global Financing segment facilitates clients' acquisition of IBM systems, software and services. It invests in financing assets, leverages with debt and manages the associated risks with the objective of generating consistently strong returns on equity. Its capabilities include Client Financing, Commercial Financing and Remanufacturing & Remarketing. The Client Financing offers lease and loan financing to end users and internal clients for terms generally between one and seven years. The Commercial Financing offers short-term inventory and accounts receivable financing to dealers and remarketers of IT products. The Remanufacturing & Remarketing engages in refurbish and sale of equipment which are returned at the conclusion of a leaser transaction to new or existing clients both externally and internally. International Business Machines was founded by Thomas J. Watson Sr. on June 16, 1911 and is headquartered in Armonk, NY.

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