Goldman Sachs reports that IBM’s recent financial results handily beat street estimates and it should do well going forward.
IBM Corporation (IBM) – (Buy, $81.98)
Q4 2008 (Dec-08) Earnings
SUMMARY COMMENT: STRONG Q4 EARNINGS AND 2009 OUTLOOK OUTWEIGH WEAKER REVENUE - SHARES SHOULD CONTINUE TO OUTPERFORM; MAINTAIN BUY RATING
Key Takeaways:
* Even after adjusting for a lower tax rate, lower share count, and higher IP income, IBM’s December-quarter earnings would have been $3.12 ($3.28 as reported), still beating the Street’s $3.03 and our $3.06 handily.
o Opex came in almost $200M below expectations as IBM’s cost cuts have already started to kick in.
* The revenue shortfall of a little over $1B came from an incremental currency drag, which accounted for about $300M of the shortfall, and hardware which was $540M shy of our estimate (and lower gross margins). Services was also light by $570M on revenue but saw higher gross margin.
* IBM’s 2009 earnings target of “at least $9.20” is significantly higher than the recently-reduced Street estimate of $8.75 and our $8.90. We think this will be driven by cost cuts, gross margin improvement, and a lower tax rate on lower revenue.
Highlight Items:
* IBM’s revenue was $27.0B, down 6.4% year/year vs. our / the Street’s estimates of $28.1B.
o Currency impact was -500 bps vs our estimate of -400 bps.
o Hardware revenue came in at $5.4B vs our estimate of $6.0B.
o Total services revenue came in at $14.3B vs our estimate of $14.9B
o Software revenue came in at $6.4B vs our estimate of $6.4B.
o Services signings were $15.6B at constant currency up 2.0% year/year (down 5% on a reported basis) vs our estimate of down 9%-12% at constant currency.
o The year-ago quarter’s signings were $15.4B and last quarter’s signings were $11.1B at constant currency.
* EPS was $3.28 vs. our estimate of $3.06 and the Street’s estimates of $3.03.
* Gross margin was 47.9% vs. our estimate of 46.7%.
o Hardware gross margin was 39.9% vs our estimate of 44.3% (last quarter was 36.2% and the year-ago quarter was 45.7%).
o Services gross margin was 32.9% vs our estimate of 30.7% (last quarter was 30.9% and the year-ago quarter was 27.8%).
o Software gross margin was 87.7% vs our estimate of 87.0% (last quarter was 84.7% and the year-ago quarter was 87.1%).
* IP income was $328M vs our estimated $265M.
* Total OpEx (incl IP income) was was $7.03B (-4.5% year/year) vs our estimate of $7.28B (-1.1% year/year).
* Total OpEx (ex IP income) was $7.36B (-3.2% year/year) vs our estimate of $7.55B (-0.7% year/year).
* Other Income was $97M vs our estimate of $85M.
* Operating margin was 21.9% vs our estimate of 20.7%.
Go Forward:
* IBM introduced its 2009 earnings target of “at least” $9.20.
o We are at $8.90 vs. the Street’s $8.75.
Descriptive Stats
YTD Performance Valuation Multiples(1) Rel. S&P
IBM -2.25% P/S (’09) 1.2x
GHA -3.49% P/E (’08) 9.6 0.8x
S&P 500 -10.02% P/E (‘09) 9.5 0.7
(1) Based on estimates prior to earnings release.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: David Bailey; Min Park.
