IBM took a Haircut over ACN Lowering Full Year EPS Guidence by 2.3% on a 2.7% Revenue miss
Revenue came in at $7.2 b instead of $7.4 b.
They said that consulting contracts were down by an unexpected 10% which was most of the miss. Accenture had a ttm p/e over 18 before the report which was about 30% higher than IBM.
IBM has a more diversified book of revenues than ACN. And it's a slower grower than ACN in good times and rough patches. IBM gets around 75% of annual revenue from the beginning backlog which provides IBM stability and predictability. The remaining 25% of sales breakdown into two components -- Sales to the existing base, Sales to new customers.
I'll get concerned when I see IBM's margins start to rollover. IBM has been able to raise margins by avoiding low margin or commodity product and moving to higher margin business like innovative software and engineered systems.
It's because of margin pressure that there is speculation that IBM is trying to sell its Intel server business. It makes sense for IBM to shrink down to the highest margin hardware and buy hardware when it's appropriate for a contract. This is exactly what ORCL is doing.
So I thought the reaction to ACN and before that ORCL was overdone. I listened to the replay of the CFO at the Barkleys conference on May 24 and he went into some detail about the $450 mil that did not close in Q1. Said it was high margin revenue including big software deals. He also said that IBM would hit the $3.79 composite for Q2 and acknowledged that the deal carryover would be a tailwind for Q2. Also, he expected a pickup 2H with a double digit earnings performance in Q4. The replay is on IBM's site.