Post 2nd Quarter 2014 Results, Does IBM Amount to a Promising Notion?

Despite a reported improvement in Earnings Per Share (EPS) of 34%, for Q2, 2014, IBM remains, in this writer’s opinion, little more than a promising notion of a business capable of producing double digit revenue growth, and even more profitability at some point in the future. Year over year, IBM’s revenue, worldwide, shrunk by 2% at Constant Currency (@CC). The shrinkage rate for some of this company’s products were firmly planted in the double digits (sales of IBM’s Power Systems declined by 29% @CC).

As has been the case for several quarters, the real story for this quarter can be found not in business growth, but in substantial reductions in operating costs. Selling, General and Administrative (SG&A) costs were successfully reduced by 16%, share buybacks amounted to $3.7Bil for the quarter, and $19.5Bil for the last 12 months. The $1Bil workforce re-balancing expense of the prior year was absent from this report, which contributed to the comparative increase of y/y profitability.

Some of the revenue highlights reported by Martin Schroeder, CFO, included 20% growth in IBM’s business in Brazil, and what he referred to as strong sales of the System Z Mainframe and storage systems. Schroeder also referred to the 2% y/y improved revenue from the Japan market as a strong performance for the quarter. SoftLayer®, which is an IBM offering for the global IaaS market saw sales growth of 1%. Another component of IBM’s cloud strategy, Bluemix only recently launched, and contributed nothing to the revenue mix for the quarter. Notably, Schroeder reported 40% y/y growth in SaaS development contracts. Sales of Tivoli systems were up by 3%, y/y @CC, which represented the 11th straight quarter of expansion for the product line. Finally, Schroeder reported IBM’s overall cloud business grew by more than 50%, y/y.

With these, at best, modestly positive revenue results, one might ask why the optimism about IBM’s prospects? In this writer’s opinion, the optimism is overstated. Perhaps the answer has to do with IBM’s announced partnership with Apple. Schroeder referred to this global partnership at several points as he reported operating results. For the record, with its large services organization, and stated intention to build its software business, IBM should benefit from any success attributable to the Apple global partnership. But significant gaps between predictions for the quarter for software sales, together with what might be fairly referred to as IBM’s own ambivalence about its semiconductor business (the entire business was put up for sale earlier this year, but IBM has recently announced an intention to invest $3B to research future chip design), might give investors a reason to listen closely to this quarterly report.

Disclaimer: I have no investment in IBM at this time, and no plans to make one in the near future.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved

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