This blog is devoted to helping investors make informed decisions. It will be regularly updated and provide opinions on earnings results. It is not intended to give investment advice and should not be taken as such. Consult your investment advisor.
When looking at IBM’s(NYSE: IBM)
results there are always two concerns. The first is IBM itself and the
second is the commentary around all its various sectors and what this
means for its competitors. Therefore I’m going to split this article
into first discussing IBM's main business segments and then the
individual components.
IBM Disappoints
The market didn’t like the results or the associated commentary.
Management pointed out that September saw a sharp fall off in demand
from North America and what IBM calls its ‘Growth Markets’ (the BRICs
and other emerging markets). Of course these regions are supposed to be
the stronger areas of the global economy!
On closer inspection the weakness in the BRICs was mainly attributed
to Brazil with the other countries growing strongly. Meanwhile Australia
and Mexico were also cited as areas of poor performance. As for North
America, if it is broad based macro weakness than we will be hearing
about it soon enough from other tech companies. It is tempting to get
into an in-depth play by play analysis and formulate reasons and excuses
that lead to concluding that the quarterback and overall offensive unit
playing tag football in the park are actually Dan Marino’s 1984
Dolphins in disguise. The difference is that Marino’s stats backed up
the claim while IBM’s trends do not.
To be fair to IBM, currency effects have affected results. For
example, Software and Global Technology Services had positive sales
growth on a constant currency basis with numbers of 3% and 1%
respectively. Software has more than double the gross margins of the
other three major segments. Moreover Software apparently had a ‘handful
of deals’ that slipped into the next quarter so the underlying
performance is probably better than has been reported.
On a more negative note, Global Business Services has been negative
on any basis you like for the last few quarters but the real
disappointment was saved for Systems & Technology. Even adjusting
for the divestiture of Retail Store Solutions and currency effects,
hardware revenues were still down 9%.
To look at these issues closer I have broken down revenues on a sequential basis.
This helps filter out some of the currency effects. Frankly it’s hard
to conclude that technology markets aren’t slowing but are there
pockets of resistance or even strengthening growth?
What IBM’s Results Indicate for the Competition
Essentially it is a story of hardware weakness with some strength in
areas like business analytics, cloud computing, storage software and
database management.
In fact total branded middleware solutions were up 3% on a constant currency basis and this should interest Tibco Software(NASDAQ: TIBX)
shareholders after it confounded the naysayers with a set of results
and outlook that wasn’t as bad as most had feared. However with the
recent weakness in IT and IBM's commentary I’m looking at Tibco’s
guidance for Q4 license revenues and wondering if it is now going to hit
it.
I would also be concerned about prospects at Master Data Management (MDM) Informatica(NASDAQ: INFA)
because this company has been largely blaming Europe for its troubles
but IBM said that the drop off was generally in North America.
Informatica is a small company (giving results soon) which competes
against some behemoths like IBM, Oracle (NASDAQ: ORCL) and SAP and if the tech market is slowing overall, it is not unreasonable to expect these companies to compete that much harder.
Speaking of Oracle it also competes with IBM in data-basing, storage
analytics and middleware. The news on the storage was mixed with
hardware down 8% but software (reported within Tivoli) was up 14%. It
all suggests that Oracle might be better placed to deal with the current
markets than most IT companies. Another company who might also have
cause for optimism is CA Technologies(NASDAQ: CA)
which competes with Tivoli within enterprise management software.
Earnings estimates haven’t come down much for CA this year and the stock
has performed well. If Tivoli’s results are anything to go by then
perhaps it too can outperform?
Where Next for IT?
The key takeaway from these results is that the results seem to be
part of a trend within IBM’s operations (see first graph) therefore it
is too early to conclude that there is broad based weakness in North
American corporate spending on IT. Moreover, the relative outperformance
of software versus hardware suggests that there are opportunities out
there for certain companies, but stock pickers are going to have to be
very selective and watch the earnings season very closely.
No comments:
Post a Comment