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IBM Unintimidated

Posted on Monday, Oct 20th 2008

Some good news amidst this bloodbath. IBM is second on my recent list of Top 10 Outsourcing Stocks and its recent earnings show why. Despite the tough market, the company had a strong quarter. IBM had grown stronger in the face of the Great Depression and its performance through recent quarters (read earlier coverage of Q407, Q108 and Q208) is another indicator that the company is well prepared to sail through the current market conditions.

Q3 revenue was $25.3 billion, up 5%. Net income was up 20% to $2.8 billion or $2.05 per share. Analysts had expected earnings of $2.01 on revenue of $26.5 billion. Gross profit margin increased to 43.3% from 41.3% in Q307, driven by strong performance in services and software segments. It repurchased shares worth approximately $2.7 billion and generated $2.1 billion in cash, about $500 million less than last year. IBM had about $10 billion in cash and $4.5 billion of commercial paper at the end of the quarter.

Software was the strongest segment with revenue up 12% to $5.2 billion. Middleware Products revenue grew 12% to $4.1 billion, Operating Systems revenues grew 5% to $594 million, and Information Management software revenue grew 26%, helped by the Cognos acquisition. 

Revenue from Global Technology Services increased 8% percent to $9.9 billion, driven by strong growth in Integrated Technology Services. Global Business Services segment revenue grew 7% to $4.9 billion.

Systems and Technology segment revenue was down 10% to $4.4 billion despite a 25% increase in revenue from System z mainframe server products. Revenue from Global Financing was up 2% to $633 million or 2.5% of total revenue. In the earnings call, IBM CFO Mark Loughridge clarified that IBM is not exposed to consumer or mortgage lending as 60% of its portfolio is with investment-grade clients.

By region, EMEA was the strongest with revenue growing 10% to $8.9 billion while Asia Pacific revenue grew 6% to $5.2 billion and the Americas grew 3% to $10.5 billion.

IBM held on to its EPS forecast of $8.75 in 2008. It is currently trading around $91, picking up after hitting a 52-week low of $83.51 on October 10. If you are in capital preservation mode, IBM is a pretty safe bet, and you can buy it for cheap as the market somersaults around over the next 3 weeks.

Chart for International Business Machines Corp. (IBM)

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What, if any, did IBM’s financing business have on this quarter? What percentage of Global Services, or Platform revenue was from heavily financed deals?

Truman Monday, October 20, 2008 at 11:25 AM PT

I don’t see that reported, but in general, IBM doesn’t sell to very small companies, so whatever they are financing, is still to larger companies with relatively low risk of default.

I imagine, in a market where credit is choking up, IBM’s willingness and ability to use “credit” as a financial tool would allow them to “play” the market, though, going forward.

Sramana Mitra Monday, October 20, 2008 at 10:15 PM PT