IBM raises '13 outlook; second-quarter earnings beat, revenue drops

Wed Jul 17, 2013 7:32pm EDT

The IBM logo is seen outside the company's offices in Petah Tikva, near Tel Aviv October 24, 2011. REUTERS/Nir Elias

The IBM logo is seen outside the company's offices in Petah Tikva, near Tel Aviv October 24, 2011.

Credit: Reuters/Nir Elias

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(Reuters) - IBM (IBM.N) raised its full-year outlook on Wednesday based on cost cutting and a strong software pipeline.

International Business Machine Corp beat second-quarter earnings estimates thanks to growth in its mainframe and software units, but missed on revenue.

"In the first half, we've had strength in Latin America and the Middle East and Africa region, but declines in some of our larger markets like China and Australia have impacted the overall performance," Chief Financial Officer Mark Loughridge said on a call with analysts.

"As we look at the second half," he said, "we have some very, very distinct tailwinds."

He added IBM had the best services backlog growth in four years and a very strong software pipeline going into the second half.

The company's shares, which had been up after-hours nearly 3 percent, gave about half of that back to end all of Wednesday's New York trade up 1.25 percent at $197.01.

IBM said that excluding a $1 billion restructuring charge related to job cuts, it raised its non-GAAP earnings per share expectations for this year by 20 cents to at least $16.90.

The cuts were taken mainly outside of the United States, a spokesman said, adding about 60 percent were from IBM's services division and 20 percent each from its hardware and software segments.

IBM also said that a "substantial second-half gain" it was expecting from a divestiture in its previous EPS outlook "will not likely be achieved" by the end of 2013.

Loughridge did not give details apart from saying that the company was still in active discussions and that it would not sell too low or rush into a sale.

Nevertheless, he said, "fundamentally, whether we close a large divestiture this year or not, we'll not have any effect on our ability to achieve our 2015 objective of at least $20 per share on an all-in basis".

Earlier in the year news of talks between IBM and Lenovo over the sale of IBM's System X server business surfaced but were not confirmed by the companies.

Brian Marshall, an analyst at ISI Group, said the sale "is perhaps the last significant opportunity to optimize gross margins of the IBM product portfolio".

He estimated it could fetch $2 billion to $3 billion in a sale.

Total operating non-GAAP gross profit margin was 49.7 percent in the 2013 second quarter compared with 48.2 percent a year earlier.

The Armonk, N.Y.-based company said its quarterly non-GAAP income rose 3 percent, excluding a $1 billion restructuring charge, to $4.3 billion, or $3.91 a share, compared with $3.51 a year ago and analyst estimates of $3.77 a share, according to Thomson Reuters I/B/E/S.

On a GAAP basis, earnings per share were $2.91, down 13 percent; net income was $3.2 billion, down 17 percent.

Revenue dropped 3 percent to $24.9 billion below average analyst expectations of $25.4 billion.

Adjusted for currency, software revenue was up 5 percent and its mainframe revenue rose 11 percent in the quarter. Currency negatively impacted overall revenue growth by about $500 million.

Loughridge said he expected a continued negative impact from currency through the year.

Several brokerages had cut their price targets for IBM in the past weeks on concerns over revenue growth and recent weaker performance by competitors Oracle (ORCL.N) and Accenture (ACN.N).

Analysts said the results were better than expected, especially after IBM posted a rare miss in its first quarter.

"After a first half that showed muted demand at best, you have a 20 cent raise excluding the workforce rebalancing, what is implied you are going to have strength in the higher margin software and services," said Edward Jones tech analyst Josh Olson.

Andrew Bartels, an analyst at Forrester Research, said IBM's strength in software demonstrated that its "strategic shift to focus on software is paying dividends".

"For the broader tech market perspective, software overall will continue to be one of the strongest tech segments in 2013," he added.

(Additional reporting by Jennifer Saba; Editing by Leslie Gevirtz)

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