IBM released another set of results last night that underlined its ability to carve out improved profits, despite significant headwinds to growth. The tech bellwether’s performance also underlines, once again, the fact that we remain some way from any discernible improvement in overall market conditions.
The headline revenue numbers were not a pretty sight. IBM’s total Q2 revenues fell by 3% to $25.8bn, easily undershooting expectations. But strip out the whopping $1bn loss due to exchange rate shifts and constant currency growth was +1%, which was the same as in Q1 (see IBM raises profit expectations, despite lack of growth). And yet again, IBM was able to carve out profit growth. Operating net income was up 8% year-on-year and EPS up 14%, with free cash flow improving by 9% to $3.7bn for the quarter.
Investors don’t seem too bothered by the persistent lack of revenue impetus from IBM. Cheered by another strong rise in profits, they have sent the company’s stock up 3% in after hours trading on NYSE.
Perhaps the biggest surprise on revenues came from the normally buoyant software division. It saw Q2 revenue constant currency revenue growth fall to 4%, compared to 7% in Q1. Hardware had another tough quarter, with a 7% decline. Meanwhile, IBM’s two services groupings - Global Technology Services and Global Business Services - returned +2% and -1% respectively.
It’s in services that IBM is managing to create much of its profit growth, most notably in GTS, where pre-tax income in the quarter was up 24% to $1.8bn on revenues of $10.0bn. In GTS, IBM has set about doing remedial work - automation, re-resourcing, re-negotiating, etc - on a slew of low margin contracts. That process started in earnest in late 2011, and the effects are really showing up in IBM’s profit numbers. It’s not clear from the comments of CFO Mark Loughridge to analysts how much more profit from existing contracts IBM will be able to eke out in this way. But the benefits of such programmes are inevitably finite, even for IBM. Meanwhile, the company continues to exhibit sluggish numbers on services wins, with the total services backlog flat at constant currency year-on-year.
On a more positive note, the UK business once again shone, amidst another difficult quarter for Europe as a whole. That’s the 11th straight quarter of growth for IBM UK - a feat few of IBM’s developed markets country businesses, or indeed competitors in the UK market, can match.
Finally, Loughridge did point to improved trading conditions in June, particularly in hardware sales. That echoes comments from Computacenter earlier this week (see Computacenter’s “fantastic” first half services growth). We’d put these observations down to an end of quarter/half blip, rather than anything amounting to the green shoots of some broader recovery. IBM’s results underline that, thanks to the persistent macro-economic uncertainties, such green shoots are yet to germinate.