Commerce A New Strategic Direction For IBM

IBM (NYSE:IBM) this week reported strong results that beat estimates driven by its server business. As a result, it raised its full-year outlook. IBM is also benefiting from its focus on analytics, cloud computing and the Smarter Planet initiative. It announced another new initiative, Smarter Commerce, to address rising customer demand in the increasingly digital commercial world.

Financials
IBM reported first quarter revenue of $24.6 billion, an increase of 8% compared to analyst estimates of $24 billion. Net income increased 10% to $2.9 billion, or $2.31 per diluted share, from $2.6 billion, or $1.97 per share, in the first quarter of 2009. Non-GAAP EPS was up 21% to $2.41, easily beating the analyst estimate of $2.30. Gross profit margin improved to 44.1% from 43.6% last year. IBM ended the quarter with $13.2 billion of cash on hand and debt of $30.3 billion. During the quarter, the company returned $4.8 billion to shareholders through $0.8 billion in dividends and $4 billion of share repurchases.

In the first quarter, total Global Services revenues increased 6% with Global Technology Services revenue up 6% to $9.9 billion and Global Business Services revenue up 7% to $4.7 billion.

Systems and Technology revenue was up 19% to $4.0 billion. The most impressive growth was IBM’s high-value systems. System z mainframes were up 41% and POWER was up almost 20%.

Software revenue was up 6% to $5.3 billion with the company’s key middleware products, which include WebSphere, Information Management, Tivoli, and Lotus increasing 16% to $3.3 billion while business analytics revenue was up 20%.

Revenue from  Americas increased 9%, EMEA grew 3% and Asia-Pacific increased 12%. IBM continued its expansion into new markets and this quarter, it had double-digit growth in almost 40 growth market countries. Revenue from its growth markets increased 18% with revenues in the BRIC countries – Brazil, Russia, India, and China – increasing 26%. Growth markets accounted for 21% of revenue.

Regarding the impact of the recent tsunami disaster in Japan, CFO Mark Loughridge said:

“We have 11% of our revenue in Japan with the bulk of our business in Services, which is predominantly annuity based. And so it tends to be more stable through various market conditions. Looking at the dynamics in the quarter, we had some deterioration in March, but it really wasn’t that different than we saw through February. So we didn’t see a big change in the trajectory of the business.”

IBM reported a decline in signings of new business at its global services division, which analysts say is a possible indication of weakness ahead. J.P. Morgan Securities analyst Mark Moskowitz said he expects shares of IBM to be under pressure in the short term, but his long-term view is increasingly constructive.

Based on its performance, IBM raised its full-year 2011 non-GAAP EPS outlook to at least $13.15 from its earlier forecast of $13.00. IBM is trading around $164.75 with market cap of about $200.9 billion. The stock hit a 52-week high of $167.72 on March 9.

Key Focus Areas and Acquisitions
Analytics and cloud computing have been two key focus areas for IBM and are expected by the company to become $16 billion and $3 billion businesses, respectively, by 2015. The company said cloud revenue was five times the first quarter 2010 revenue and that it is on track to double its cloud revenue in 2011. Last week, it announced both new private cloud software and the IBM SmartCloud, which is designed to run production applications.

Smarter Planet, another key focus area that is expected to grow to a $10 billion business, increased 20%.  Smarter Planet is an initiative to digitally monitor infrastructure such as roads, energy, and hospitals to make them more efficient. To pursue this Smarter Planet initiative, IBM recently acquired Tririga, a provider of facility and real estate management software solutions.

Last week, IBM announced a new initiative – Smarter Commerce that integrates acquisitions like Coremetrics and Sterling Commerce to help businesses adapt to rising customer demand in today’s B2B and B2C marketplaces, which have been transformed by digital technology. The company expects this initiative to grow to $20 billion in software alone by 2015, even more than analytics.