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Analysis of IBM’s First Quarter Business Results

Turnaround Continues…

Stronger-than-expected Revenues, New Contract Sales Boost Outlook

PHOENIX, Apr 15 - Big Blue’s turnaround seems to be continuing (see “Start of a Real Turnaround”, Jan 17).  Stronger-than-expected revenues (up 11%), and solid IBM Global Services’ (IGS) new contract sales, ($12 billion) boosted IBM’s first quarter results and lifted the outlook for the rest of the year. 

“In a tough environment; we are on track for 2003,” IBM CFO, John Joyce, told Wall Street analysts during the earnings call.  And it’s a muddy track at that, judging by the competitors’ results.

As a result, IBM shares rose almost two points in after-hours trading following the release of its first quarter results after the markets closed on Apr 14. 

Big Blue’s first quarter earnings were also up compared to the same period a year ago (up 16% to $0.79/share).  But that was really not that big of a feat, given that we contemporaneously termed the first quarter of last year “A Disastrous Quarter” (Apr 17, 2002). 

One year ago, for the first time in history, all IBM business segments’ revenues were down.  Not so this time around.  Despite a continued difficult economic environment and the global instability brought about by the Iraq war (i.e., the “muddy track”), IBM managed to grow the revenues in four of its six major units.


Our report then goes on to describe the reversal of IBM's stock buyback strategy, and analyze in detail the performance of various IBM business units and the reasons we feel that a real turnaround may be in the offing at Armonk:

Backing Off Buybacks

Describing the change as “a strategic shift,” the IBM CFO said the company has opted to divert its capital spending away from stock buybacks and into acquisitions that may improve its competitive position in various markets.


IBM shareholders should welcome this “strategic shift.”  For, it is a shift from lunacy to sanity.  That’s something we’ve been advocating for almost six years now (see Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, Apr 1997).


Business Segment Analysis

IBM Global Services.  IBM’s largest business segment also turned in the best results in the first quarter.  The IGS revenues were up 26% (up 17% in constant currency), while the maintenance portion rose 7% (flat in constant currency).


Hardware.  Although IBM’s overall hardware revenue was down 1% from the first quarter of 2002, the decline was less than most analysts expected. 


Software.  Despite some soft spots within its portfolio, the IBM software continues to surprise on the upside.  The first quarter revenues were up 8% (up 2% in constant currency) while its gross margin from 81% to 85%.  That’s a higher level of profitability than even that of the IBM mainframes in their heydays.


Geographies.  Perhaps surprisingly given the alleged slowdown in the U.S. economy, the Americas region - IBM’s biggest at 43% of total - was the best performer in the first quarter.  Even though the Americas’ revenues increased by only 5% as reported, they were up by 7% in constant currency.  


Industries.  Given that we are basically operating in a global war economy, it should not be surprising that the public sector continues to be the fastest growing part even of IBM, a company that exited the U.S. federal market in 1994.  This industry segment was up 19% as reported and 11% in constant currency. 


"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, and who are now reading the complete Annex Bulletin (12 pages in print edition), along with all charts which back up our story.

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Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2003: “Turnaround Continues...” (Apr 15), “Start of a Real Turnaround?” (Jan 17).

2002: “Gerstner: The Untold Story”  (Dec 27), "Gerstner Spills the Beans" (Dec 13), "On a Wing and a Prayer" (Oct 21), "IBM-PwC Tie the Knot" (Oct 2), "Half or Double Trouble?" (Aug 12), Wall Street/Main Street Chasm (June 25), “Wall Street Casino,” (June 21), Big Blue Salami (June 19), "Looming IBM Layoffs" (May 14), "IBM 5-Yr Forecast: From Here to Eternity?" (Apr 2002),  “Tough Times, Soft Deals,” (Apr 25, 2002), “Gerstner’s Legacy: Good Manager, Poor Entrepreneur” (Jan 2002), IBM Pension Plan Vapors: Where Did $17 Billion Go? (Mar 2002), "Sir Lou OutLayed Lay!" (Apr 1, 2002).

A selection from prior years: Is IBM Cheating on Taxes, Annex Bulletin 99-17 (May 1999),  IBM 5-year Forecast 2001: An Unenviable Legacy (June 2001) "Break Up IBM!" (Mar. 1996), Fortune on IBM (June 15, 2000), “Smoke and Mirrors Galore,” July 2000), "Slam Dunk of Bunk" (Jan 2000), Annex Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's Fudge Factory (Apr. 9, 1999)Where Armonk Meets Wall Street, Greed Breeds Incest (November 1998)Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18 (4/29/97),  "Some Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97,  Djurdjevic’s Forbes column, "Is Big Blue Back?," 6/10/97;  “Executive Suite: How Sweet!,” (July 1997), "Gerstner: Best Years Are Behind", Aug. 10, 1999), "IBM's Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's Lair vs. Bill's Loft" (June 1999),  "Corporate Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles magazine October 1998 column, "Wall Street Boom; Main Street Doom", “Louis XIX of Armonk,” (Aug. 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994), “A Nice Guy Who Lost His Compass” (Jan 26, 1993), “Akers: The Last Emperor?” June 1991), Industry Stratification Trend (Mar. 30, 1990) etc.]

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Volume XIX, No. 2003-06
April 15, 2003

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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