International Business Machines Corp. (IBM) Gives Its Technology ...

Johnson & Johnson (NYSE:JNJ) reported decent results recently and confirmed its status as a high cash flow generative company with growth prospects from organizational upside, then International Business Machines Corp. (NYSE:IBM) reported the next day and basically did the same thing. In summary, the results suggested IBM is on track with its refocusing efforts on higher margin business at the expense of pure revenue growth and its outlook provided good news for the IT industry in general.

A Better Quarter

IBM spooked the market at the time of its previous results with talk of a weak September and the technology market wasn?t slow to price this in. There is no doubt that a combination of fiscal cliff issues and the election did cause a reluctance amongst IT purchasing managers in the quarter, but when a bellwether like IBM states it so explicitly, the whole market listens.

In the end, IBM declared the current quarter was ?fairly constant month to month.? So nothing to worry about there and nor was there anything unusual about the geographic mix. EMEA revenues were down 3% and the BRICs were up an impressive 14%. US revenue was down 1%, but I suspect this is largely due to the refocus on higher margin work. In fact, gross margins expanded 190 basis points in the quarter while pre-tax margins were similarly up 200 basis points to 26.7%. Pre-tax profits went up 7.7% even as reported revenues declined .6%.

IBM?s Three Key Takeaways from the Quarter

There were some very notable aspects to this quarter:

• IBM is committed to increasing profitability (possibly at the expense of revenue growth) by shifting to higher margin revenue streams. In a sense this is a given with the increase in software and services revenues relative to hardware, but even within Global Technology Services there has been an emphasis on improving the profitability of low margin contracts
• The second key point is that software and middleware strength is counteracting any move away from hardware. Indeed IBM reported acceleration in middleware growth from the rate achieved in the previous quarter.

Middleware is expected to contribute mid-single digit growth in 2013.

• The third key takeaway is that IBM managed to achieve a rebound in its System Z mainframe revenues so total systems revenues were actually up 4% excluding numbers from Retail Store Solutions (RSS). Indeed, IBM talked of double digit growth being driven in the first half by the strength of hardware sales of System Z. Impressive stuff.

How This Relates to the IT Industry

Essentially I think it is pretty good news for the likes of Oracle Corporation (NASDAQ:ORCL), which is a key competitor in the middleware market, and I think Informatica can take a positive from the ongoing strength in big data analytics and master data management. The re-acceleration of growth in these initiatives in Q4 added to the affirmation of decent growth in overall software spending suggests that both will have good quarters.

However, for companies that are predominantly hardware based like?Dell Inc. (NASDAQ:DELL) or?Hewlett-Packard Company (NYSE:HPQ) it was not such a positive report. Although IBM has long exited the PC business, the trend in hardware sales is not good and arguably IBM only reported good results here because of the new System Z mainframe sales. Storage hardware saw a 5% decline and HP and DELL are both key competitors here. In addition, IBM saw power sales down 19%, but claimed that it won significant business from both Oracle and HP. If you put these things together with what Intel Corporation (NASDAQ:INTC) said recently about PC sales then it suggests HP and Dell are set for some tough quarters ahead.

Source: http://www.insidermonkey.com/blog/international-business-machines-corp-ibm-gives-its-technology-outlook-44153/

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