International Business Machines () posted mixed first-quarter results after the close Tuesday. Though the firm showed material bottom-line expansion, the firm’s top-line growth was relatively modest and its services backlog fell before adjusting for a favorable impact from currency. We are sticking with our fair value estimate for the company.
Revenue was essentially flat from the same period a year ago as software, services and a doubling of cloud-based revenue helped offset a stiff decline in hardware sales. We were pleased to see the strength in software revenue (up 5%), but we’re slightly disappointed in the company’s services business, where revenue edged up just 1% and services backlog declined 2% before adjusting for currency. We’ll be keeping this important, “yellow flag” data point on the top of our minds as we navigate through first-quarter earnings season. So far, however, we’ve been very impressed from the performance (and earnings beats) of some of the bellwethers reporting thus far: JP Morgan, Coca-Cola (KO), and Alcoa (AA), just to name a few.
Revenue from IBM’s hardware division was the biggest drag on quarterly performance, falling 7% from the same period a year ago. Sales from System z mainframe server products fell 25% compared with the year-ago quarter, and ancillary revenue (system storage, retail store solutions, and microelectronics OEM) also left something to be desired. We don’t expect a snapback in the segment at least for a few quarters, as the company will continue to lap strong performance from the previous year (as it did this quarter).
The bottom line performance was better, but not great. Operating (non-GAAP) earnings per share advanced 15%, to $2.78 per share (consensus was at $2.65 per share). But share buybacks materially bolstered the 9% jump in quarterly operating (non-GAAP) net income, which itself was helped by a lower tax rate. Though earnings growth in the period wasn’t of pristine quality due to the lower tax rate and share buybacks, the company pulled in an impressive $1.9 billion in free cash flow, up from $1.1 billion in the year-ago period. And while we’re big fans of the company’s dividend coverage with cash flow, its annual yield, however, is still a bit too low to get us excited.
Looking ahead, IBM increased its full-year 2012 operating (non-GAAP) diluted earnings-per-share outlook to be at least $15 per share (from $14.85 previously). We think the company will be able to hit that forecast.