IBM’s (NYSE:IBM) Q3 disappoints, stock drops

October 17, 2011 6:46 PM18 commentsViews: 50

IBM's (NYSE:IBM) Q3 disappoints, stock drops

SAN FRANCISCO – IBM’s quarterly results failed to impress investors used to a stellar showing from Big Blue, adding to concerns about lackluster corporate IT spending and dragging its stock down more than 3 percent.

The company’s earnings beat forecasts and it increased its 2011 earnings-per-share outlook but it faced a high hurdle after recent strong reports from Oracle and Accenture, and analysts focused on slower expansion in key regions and businesses.

Further stoking worries about IT spending, business software maker VMware Inc posted quarterly profit above expectations but warned of uncertainty among some of its corporate customers in Europe.

“We have seen a bit more scrutiny and higher levels of approval required. Particularly with larger deals where they would go for CFO and CEO approval, where in the past we may not have seen those approvals to be necessary,” said VMWare Chief Financial Officer Mark Peeking.

IBM, an information technology hardware bellwether with a global clientele, said total services signings — an indicator of future growth — climbed to $12.3 billion in the third quarter, in line with expectations.

“The growth rates IBM experienced in each of the regions — Americas, Europe and Asia — are all decelerating and the public sector is exhibiting no growth,” said Shebly Seyrafi, an analyst at FBN Securities. “I wouldn’t say we’re falling off a cliff, but there is a slowing in IT spending.”

Revenue rose 8 percent to $26.16 billion, marginally softer than the average forecast of $26.26 billion.

Buttressed by recurring revenue that helps keep IBM’s results steady in strong and weak economies, its shares have outperformed the market and hit a record high on Friday. They are up about 28 percent this year versus the Standard & Poor’s 500 index’s 4 percent dip.

On Monday, International Business Machines Corp’s stock fell 3.7 percent to $179.70 in extended trade after closing down 2.1 percent on the New York Stock Exchange.

“The company exceeded published expectations, but the underlying expectations were even higher,” Annex Research analyst Bob Djurdjevic said. “Investors who have been very bullish on IBM are probably taking some profits now.”

RISING CLOUD

U.S. economic concerns and a worsening European financial crisis have hurt consumer demand. Companies such as IBM that sell hardware and software for data centers powering the Internet have remained resilient.

IBM said revenue from cloud computing in the first nine months of this year was twice as much as in full-year 2010.

Adjusted for currency, IBM’s revenue from the Americas rose 6 percent in the quarter, with Europe, Africa and the Middle East flat, and Asia up 1 percent.

IBM also derives a major portion of its revenue from government spending and the financial services industry — both hit hard by widening fiscal deficits and crumbling markets, respectively.

IBM has consistently beaten Wall Street forecasts. In the second quarter, it trounced expectations with signings of new business surging 16 percent. At the time, that stellar performance raised hopes that 2011 would be a good year for overall tech-spending.

On Monday, it raised its full-year diluted earnings forecast to at least $13.35 per share, from its prior estimate of at least $13.25. Analysts had expected $13.32, according to Thomson Reuters I/B/E/S.

IBM reported a third-quarter profit, excluding items, of $3.28 per share, up 15 percent year over year and above expectations of $3.22.

“Whatever IBM could control, they did a great job. But they are not immune to macro conditions. Financial conditions are tough,” said Global Equities Research analyst Trip Chowdhry.

“People don’t want to cancel projects, but projects are getting delayed. Sales cycles are getting elongated. New projects are getting smaller budgets.”

Despite uncertainty in the fourth quarter and 2012, some portfolio managers remained confident in IBM’s ability to weather a tougher global environment.

“IBM’s business has a degree of resiliency to it. The company has maintenance agreements that generate recurring revenue, giving us more visibility on future results,” Wirtz said.

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