IBM Q3 12 results: globally negative sector read-across

News published on October Wednesday 17, 2012
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IBM yesterday evening reported Q3 12 results in line with expectations (non-GAAP EPS of USD3.62 vs. consensus est. of USD3.61), but revenues (USD24.75bn) were 2% below consensus with weakness in Software in September. Management reiterated FY12 non-GAAP EPS guidance of at least USD15.1 and was banking on a catch-up in Software for Q4. In addition, momentum worsened in Global Services in Systems Integration. IBM’s share price reacted negatively after hours (-3%), and we consider that even if the results remain relatively solid, the read-across is negative for listed European Software & IT Services companies as deals look more difficult to sign amidst economic headwinds.

ANALYSIS

  • Implications for SAP. In Software, IBM reported sales up 3% at cc (vs. +4% at cc in Q2 12) with a trend at +5% in July and August, then a fall off in September with a handful of deals that failed to close at the end of the quarter – in particular in North America and emerging markets. However management expects mid-single digit growth in Q4 12. We consider this as a negative read-across for SAP on a sector standpoint, because licence deals are more difficult to sign for IBM and make every quarter a challenge. NB. Information management (Databases, Business Intelligence, Business Analytics) rose 3% at cc, vs. +3% in Q2 12, especially driven by Business Analytics (doubledigit growth) - which looks positive for SAP HANA in-memory revenues in our view.
  • Implications for Capgemini and Atos. In IT Services, IBM Global Services reported sales flat at cc (vs. +1% at cc in Q2 12). Strong demand prevails in Business Analytics, Cloud computing and industry-specific solutions. In Global Technology Services (+1% at cc), Strategic Outsourcing was flat (vs. +2%) with a decline in new business, Integrated Technology Services grew by 3% (vs. +4%) with +13% on growth markets. In Global Business Services, sales were down 3% (vs. -1%), including Application management down 3% (vs. -1%) and Consulting & Systems Integration down 3% (vs. flat), with North America and Europe down 6% and Japan up 2%. Services backlog is up 1% at cc to USD138bn (o/w +15% on growth markets and flat in Outsourcing), while signings are up 11% at cc to USD13.3bn (+30% in Outsourcing and -6% in Consulting & Systems Integration).
  • Implications for Software AG. IBM reported mainframe computer sales (System z) down 19% at cc (vs. -9% in Q2 12), with mainframe computing power delivery (measured in MIPS) down 2% (vs. -8% in Q2). Mainframe computer sales fell for the fifth consecutive quarter, but the launch of a new generation of System z computers (EC12) in late Q3 is expected to improve figures from Q4 12. Software AG mentioned in August that System z EC12 could be positive on its ETS (Enterprise Transaction Systems) installed base, although ETS revenues are still likely to be down mid-term. In Middleware and Business Process Management (BPM), IBM’s WebSphere sales were up 5% at cc (vs. +7% in Q2 12), but the figure looks to be difficult to extrapolate to Software AG’s BPE division.
VALUATION
  • European Software companies: 11.4x 2012 and 9.5x 2013 EV/EBIT multiples.
  • European IT Services companies: 6.8x 2012 and 5.6x 2013 EV/EBIT multiples.
NEXT CATALYSTS
  • Software: SAP Q3 12 results 24th October before markets open; Dassault Systèmes Q3 12 results 25th October before markets open; Software AG Q3 12 results 30th October before markets open.
  • IT Services: Atos Q3 12 sales 25th October before markets open; Capgemini: Q3 12 sales 8th November after markets close.
Analyst : Gregory Ramirez / 33(0) 1 56 68 75 91/ gramirez@bryangarnier.com

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