IBM reported its third quarter 2013 results on Wednesday. Total revenues for the third-quarter of 2013 of $23.7 billion were down 4 percent from the third-quarter of 2012.

IBM reported third-quarter 2013 diluted earnings of $3.68 per share, compared with diluted earnings of $3.33 per share in the third-quarter of 2012, an increase of 11 percent.

Third-quarter net income was $4 billion compared with $3.8 billion in the third-quarter of 2012, an increase of 6 percent.

Ginni Rometty (Chairman, president and chief executive officer, IBM): In the third-quarter we continued to expand operating margins and increased earnings per share, but fell short on revenue. Where we had identified high growth opportunities and pursued them aggressively — cloud, mobile, business analytics, and security — we continued to show strong growth. This underscores our strategy to continuously transform the company to high value.

“We are taking action to improve execution in our growth markets unit and in the elements of our hardware businesses that are under performing. Given these actions, our strategic initiatives and the strength of our model, we are maintaining our view for the full year and remain confident in our ability to achieve at least $20 operating EPS in 2015.”

Full-Year 2013 Expectations

IBM expects full-year 2013 earnings per share of at least $15.01.

Geographic Regions

  • The Americas’ third-quarter revenues were $10.3 billion, a decrease of 1 percent (flat, adjusting for currency) from the 2012 period.
  • Revenues from Europe/Middle East/Africa were up 1 percent to $7.3 billion (down 2 percent, adjusting for currency).
  • Asia-Pacific revenues decreased 15 percent (down 4 percent, adjusting for currency) to $5.5 billion.

OEM revenues were $534 million, down 1 percent (flat, adjusting for currency) compared with the 2012 third-quarter.

Growth Markets

Revenues from IBM’s growth markets were down 9 percent (down 5 percent, adjusting for currency). Revenues in the BRIC countries — Brazil, Russia, India and China — were down 15 percent (down 12 percent, adjusting for currency).

Services

Global Technology Services segment revenues decreased 4 percent (down 1 percent, adjusting for currency) to $9.5 billion. Global Business Services segment revenues were flat (up 5 percent, adjusting for currency) at $4.6 billion.

Pre-tax income from Global Technology Services increased 12 percent and pre-tax margin increased to 19.4 percent. Global Business Services pre-tax income increased 28 percent and pre-tax margin increased to 20.0 percent.

The estimated services backlog at September 30 was $141 billion, up 2 percent year over year at actual rates (up 6 percent, adjusting for currency).

Software

Revenues from the Software segment were $5.8 billion, up 1 percent (up 2 percent, adjusting for currency) compared with the third-quarter of 2012. Software pre-tax income increased 2 percent and pre-tax margin increased to 36.8 percent.

Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Social Workforce Solutions and Rational products, were $3.7 billion, up 3 percent (up 4 percent, adjusting for currency) versus the third-quarter of 2012. Operating systems revenues of $576 million were down 4 percent (down 2 percent, adjusting for currency) compared with the prior-year quarter.

Revenues from the WebSphere family of software products were flat year over year. Information Management software revenues increased 2 percent. Revenues from Tivoli software increased 2 percent. Revenues from Social Workforce Solutions increased 14 percent, and Rational software increased 12 percent.

Hardware

Revenues from the Systems and Technology segment totaled $3.2 billion for the quarter, down 17 percent (down 16 percent, adjusting for currency) from the third-quarter of 2012. Systems and Technology pre-tax income decreased $291 million to a loss of $167 million.

Total systems revenues decreased 19 percent (down 18 percent, adjusting for currency). Revenues from Power Systems were down 38 percent compared with the 2012 period. Revenues from System x were down 18 percent. Revenues from System z mainframe server products increased 6 percent compared with the year-ago period.  Revenues from System Storage decreased 11 percent. Revenues from Microelectronics OEM increased 1 percent.

Financing

Global Financing segment revenues increased 6 percent (up 9 percent, adjusting for currency) in the third-quarter at $502 million. Pre-tax income for the segment increased 4 percent to $494 million.

Gross Profit

The company’s total gross profit margin was 48 percent in the 2013 third-quarter compared with 47.4 percent in the 2012 third-quarter period.

Expense

Total expense and other income decreased 1 percent to $6.6 billion compared with the prior year period.

  • S,G&A (selling, general, and administrative) expense of $5.3 billion decreased 11 percent year over year, including the prior year third-quarter workforce rebalancing charge of $408 million.
  • R,D&E (reserach, development, and engineering) expense of $1.5 billion decreased 4 percent compared with the year-ago period.
  • Intellectual property and custom development income decreased to $191 million compared with $303 million a year ago.
  • Other (income) and expense was income of $62 million compared with prior-year income of $606 million, which included a $447 million gain from the divestiture of Retail Store Solutions.
  • Interest expense decreased to $97 million compared with $124 million in the prior year. 

Pre-Tax Income

Pre-tax income decreased 5 percent to $4.8 billion and pre-tax margin of 20.3 percent was down 0.2 points compared with the prior-year period.

Tax Rate

IBM’s tax rate was 16.0 percent, down 8.6 points year over year.

Cash Flow

IBM ended the third-quarter 2013 with $10.2 billion of cash on hand, and generated free cash flow of $2.2 billion, excluding global financing receivables, down approximately $0.9 billion year over year. The company returned $3.0 billion to shareholders through $1.0 billion in dividends and $1.9 billion of gross share repurchases.

IBM – Year-To-Date 2013 Results

Net income for the nine months ended September 30, 2013 was $10.3 billion compared with $10.8 billion in the year-ago period, a decrease of 4 percent. Diluted earnings per share were $9.27, flat compared to the 2012 period. Revenues for the nine-month period totaled $72.1 billion, a decrease of 4 percent (down 2 percent, adjusting for currency) compared with $75.2 billion for the nine months of 2012.