IBM’s Portfolio Rebalancing

I recently wrote about IBM just before its earnings were released. Here’s an update.

International Business Machines Corporation (NYSE: IBM) released their earnings for Q3 on October 16. Total revenues were $24.1 billion, up 6.6% y-o-y. Diluted earnings were $1.68 per share, up 16% y-o-y.

Segment-wise, Global Business Services had revenues of $4.6 billion, a y-o-y increase of 15.9% driven by growth in core consulting and application management services. Global Technology Services segment revenues were $9.1 billion, up 12.8% y-o-y. Total Global Services revenues went up by 14% y-o-y. In Q3, IBM signed services contracts for a total of $11.8 billion, up 12% y-o-y. Long-term signings were up 29%, while short-term signings were down 5%.

Systems and Technology segment revenues were $4.9 billion, down 10.4% y-o-y. In June 2007, it divested the Printing System Division. Excluding the impact of this divestiture, revenues were down 6% y-o-y. However, IBM continues to lead the market in servers with 30% market share in Q3 per IDC.

Software segment revenues were $4.7 billion, up 6.5% y-o-y. Revenues from IBM’s middleware products, including WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.6 billion, up 6% y-o-y. Global Financing segment revenues were up 6.1% to $623 million.

The total gross profit margin was 41.3% in the quarter compared with 42.0% in Q3 2006. There were no share repurchases during the quarter after accelerated share repurchase in Q2. Year-to-date through September, it returned $20 billion to investors through share repurchase and dividends. Today, however, IBM has announced a share repurchase of $1 Billion by February 2008. The repurchases are part of the company’s plan for earnings-per-share growth through 2010.

In the quarter, IBM completed four acquisitions: Watchfire in Rational, Princeton Softech and Data Mirror in Information Management, and WebDialogs in Lotus. In November, it announced its plans to acquire BI leader, Cognos for approximately $5 billion.

Its stock is currently trading around $107 after hitting a 52-week high of $121.46 on October 11. Market cap is around $146.5 billion.

There are several things that IBM has done very well over the last 2 years, for which the market has rewarded it handsomely. One of them is the development of a systematic India strategy to balance its Global Services onshore-offshore cost-structure competitiveness, in the face of severe competition from the Indian outsourcers. Two is a series of acquisitions to build out a portfolio of Infrastructure software companies (and now, with Cognos, Application software). And three is systematically exiting hardware businesses that are either declining in growth or margins.