Surprises at IBM, Infosys and Microsoft

Lead Analyst: Cal Braunstein

IBM Corp. announced second quarter financial results with lower revenues but improved profits while Infosys Ltd. had weaker than expected first quarter 2013 results. In other financial news, Microsoft Corp. reported mixed fourth quarter and fiscal year 2012 results.

Focal Points:

• IBM reported second quarter revenues of $25.8 billion, a drop of three percent year-over-year. However, net income on a GAAP basis increased by six percent to $3.9 billion from the previous year's quarter. Asia Pacific and the BRIC countries showed single digit growth while all other geographies declined. Europe/MidEast/Africa delivered the worst performance with a nine percent decline, although using a constant currency basis the revenues were flat. Similarly, the services sectors (GBS and GTS) were off four and two percent respectively from the same quarter last year. Global Financing and Software were flat while the Systems and Technology Group (STG) experienced a nine percent fall in revenues year-over-year. IBM's Smarter Planet initiative saw its revenues increase more than 20 percent in the quarter while its Power Systems gained market share through competitive displacements. Year-to-date IBM states its growth market revenues were up nine percent year-over-year while business analytics revenues grew 13 percent and cloud revenues doubled year-over-year. The company also saw its gross profit margins climb by 1.5 percentage points.
• Infosys had less than stellar results for its first quarter 2013. While revenues grew 4.8 percent to $1.75 billion and IFRS net income climbed eight percent to $416 million year-over-year, on a sequential quarter basis, the company saw revenues drop by one percent and profits slide by more than 10 percent. Repeat business accounted for 99.1 percent of sales; the top 10 clients were responsible for 25.3 percent of the revenues. Utilization levels excluding trainees have been slowly dropping from 77.8 percent over the 12 months ending June 2011 to 71.6 percent in the current quarter. The split between onsite and offshore dropped slightly from 25.5 to 74.5 percent in the year ago quarter to 24.7 to 75.3 percent in the first quarter 2013. Attrition improved slightly to 14.9 percent. All geographic sector revenues declined with the exception of North America, which grew by 1.6 percent sequentially. As expected, Europe was the worst performer with a decline of 8.1 percent sequentially.
• Microsoft announced fourth quarter 2012 revenues of $18.1 billion, an increase of four percent from the previous year's quarter. On a GAAP basis the company reported its first net loss of $492 million due to writing off $6.2 billion for its 2007 aQuantive acquisition. For the full fiscal year Microsoft reported revenues of $73.7 billion, a five percent jump from its fiscal year 2011 revenues. On a GAAP basis net income was $17 billion, a 26 percent decrease from the prior year. The Server and Tools business revenue grew 13 percent for the fourth quarter and 12 percent for the full year while the Business Division revenue increased 7 percent for the fourth quarter and full year reflecting continued momentum in Office 2010 sales. The Windows and Windows Live Division revenue declined 13 percent for the fourth quarter and 3 percent for the full year whereas the Online Services Division revenue advanced 8 percent for the fourth quarter and 10 percent for the full year reflecting growth in its search business. The Entertainment and Devices Division revenue jumped 20 percent for the fourth quarter and 8 percent for the full year, mostly due to the addition of Skype.

RFG POV: Most vendors note the difficulties that lie ahead over the next few quarters due to Euro zone problems, a slowdown in China, and a weak economy in North America as well as fears over oil prices and Middle East crisis. How well enterprises will do will depend upon the sector(s) they are in, the geographies they serve, and the agility and innovation of the firm. IBM, which has huge backlogs, is able to plow forward through the good times and bad. Its STG products continue to fluctuate depending upon age of the systems but overall IBM is on track to deliver against its five year growth plan. On the other hand, Infosys is failing to keep up with some of its outsourcing competitors and may be running into a management of growth problem. The drop in its utilization levels is a further indication that backlog and revenue management is not mapping to usage at the desired mix. Thus, while this is an overall corporate issue, the company still maintains tremendous customer loyalty and repeat business rate. In that the company is seeing weakness in most of its markets, IT executives should be more aggressive in negotiating blended rates and the overall deal. Microsoft marches on and continues to grow its enterprise businesses. The Windows business is impacted by the decline in PC sales (and growth in the Apple Inc. iPad market). There is the perception that enterprise business will improve when Windows 8 comes out later this year but that is unlikely. While slightly more than 50 percent of enterprises are on Windows 7, the other half are on Vista and XP. It takes years before companies migrate to new releases and the move to Windows 8, in that it is designed more for the personal world and tablets than the business world, most likely will not happen for most companies. RFG expects the majority of firms will wait for Windows 9. However, RFG does expect Skype and Yammer to be leverageable in the enterprise space but it is unclear whether or not Microsoft can leverage these cloud services to get organizations to move to its other cloud offerings. IT executives will continue to have more and more business platform alternatives available to them and therefore should not feel locked into Microsoft. Given that, IT executives should carefully analyze their business software requirements and negotiate for the best deals. Since Microsoft pricing can be complex and expensive, IT executives should consider using outside assistance (from RFG or elsewhere) to simplify the experience and obtain the best contractual prices and terms.