October 9th, 2008
IBM: Beats earnings target but...
IBM said that it will beat Wall Street’s earnings estimates for the third quarter, but there were enough nuggets disclosed to raise a few eyebrows.
First, the headlines. IBM (statement) said it would report earnings of $2.05 a share, a good 3 cents better than estimates. Revenue, however, was projected to be $25.3 billion in the third quarter compared to Wall Street estimates of $26.5 billion. IBM reiterated its outlook for the year.
Add it up and you have IBM cutting costs to hit its estimates and a decline in revenue that can’t all be explained away by a strong dollar–a headwind that was flagged a few weeks ago.
So what’s this IBM preannouncement all about? A few answers:
- A ban on short selling by the Securities and Exchange Commission expired at midnight. IBM was sending a message.
- These are difficult times. IBM wouldn’t have preannounced that it would top estimates by 3 cents if there weren’t a good amount of worry in the marketplace.
- Big Blue is looking to distance itself from rivals in the tech sector. The message: Big Blue is stable–or at least as stable as arch rival Hewlett-Packard.
Also see: What’s really ailing Big Blue shares? Hint: IBM is part bank
Left unsaid in the preannouncement was color on its financial services unit, what exactly happened to revenue and how the strong dollar will change the equation. Those details will have to wait until Oct. 16.
In the meantime, here’s a look at the IBM talking heads on Wall Street:
Citigroup analyst Richard Gardner notes:
Rapid Revenue Deceleration — Constant currency revenue growth slowed from 6% yoy in 2Q08 to 2% yoy in 3Q08 (0-1% yoy excl acquisitions). Sequentially, 3Q08’s 6% decline is the largest for a 3Q since 2001 (although 1.5-2.0 points is currency). There is clear evidence of end-market slowing in this revenue figure.
Thomas Weisel’s David Grossman says:
The timing of the release was a bit awkward but likely reflects the continued pressure on its share price and tonight’s expiration of the short sale rule. September quarter revenue of $25.3bn grew 2% at constant currency and was 5% below consensus. While the market was anticipating a revenue miss, it was probably not anticipating a deceleration of this magnitude at least in the September quarter.
BMO analyst Keith Bachman adds:
Gross margins are 43.3% vs. our 43.6% estimate. Even though we cut our revenue estimates twice, we did not cut enough, and we suspect that software was the largest source of revenue variance, which would explain some of the gross margin difference. We are both surprised and confused on FCF (free cash flow) metrics. By our math, IBM did not generate FCF in the quarter. We will look for clarification when IBM reports next week.
Simply put, IBM had good news, but skeptics abound. The jury is still out.
Larry Dignan is Editor in Chief of ZDNet and Smart Planet as well as Editorial Director of ZDNet sister site TechRepublic. See his full profile and disclosure of his industry affiliations.
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