IBM came out with its 3rd quarter earnings yesterday. It is not always I follow quarterly earnings, but I’ve been keen of late and went through the entire earnings call. Beyond our key customers, IBM is easily the biggest company in Maarga’s radar. It is not that we do a lot of business directly with them, but a lot of what we do is around products that were created and sold by IBM.
We do direct business with them too, and we are a partner at the highest tier on the Lotus brand. We have multiple relationships and threads of conversations with IBM across field sales, the brand team, executives in the geographies where we are present and also the product creators themselves. We also run into the massive GBS, GTS organizations either as customers, or occasionally as competitors in one sense or other. Ofcourse, we have a bunch of people who are ex-IBM, and we also have people who’ve left Maarga and joined IBM. So, the relationship is quite extensive, and it is very interesting to see a purely financial view of such an organization every once in a while.
Beyond this relationship, IBM is also an aspirational role model for me. As an entrepreneur, I never cease to be amazed by these corporations and what it would have taken to build the brands, attract the talent, structure the systems and grow the business to this scale. In that direction, IBM as an organization is clearly a role model on multiple fronts for me as a person, and for Maarga as an organization.
Given this background, here is a quick summary of what the earnings call had in stock:
- They had a double digit EPS (Earnings Per Share) growth. IBM expects $15.10 of Operating EPS in 2012 on their journey to their targeted EPS of $20 by 2015.
- They had strong performance in growth initiatives – Smarter Planet, Analytics & Cloud
- They have a strong cash generation – $3.1 bn in Free Cash Flow last quarter.
- They were negatively affected by the strong dollar
- Hardware declined faster than anything else
The entire earnings presentation is available here (https://www.ibm.com/investor/3q12/index.phtml). Let me highlight a few key things that stood out in my mind.
- IBM’s significant focus is on EPS. This is common knowledge and self evident for a lot of people, but I was surprised by how clear the focus is. When you have this clarity in mind, all the business decisions clearly flow from this. The significant focus is not on Revenue, Operating Margins or anything else .. all these matter ONLY to the extent it contributes to EPS. This comes across clearly in the earnings presentation by the number of time Mark Loughridge (IBM’s CFO) focused on this. This goes back to the core purpose of a company – to increase shareholder value. I was left with this clarity of how focus on a single metric can drive clarity in execution in an organization. Of course, focus on EPS in a large widely owned, public organization is much different from focus on EPS in a promoter managed small privately held company. Even accounting for this, focus on EPS can drive the best business decisions as IBM clearly shows.
- The many numbers that a business needs to measure. IBM is a very complex organization. To assess how the organization is performing takes many measures. Through the presentation, I could see the many dimensions an analyst needs to see before he can assess the recommendation of a company stock. Numbers ranging from revenues, operating margin, operating EPS, numbers adjusted for currency headwinds, performance on growth initiatives, performance by different geographies, performance by different business units. On the whole IBM is sitting pretty as its key segments are growing, but there is short term headwinds on account of poor performance in North America and in the month of September.
Performance of Lotus Brand. The 7% fall in Lotus revenue clearly indicates that shift towards cloud for email that we are seeing in the market. It is good note though that Social Business is growing fast within Lotus brand, while Notes Client renewals are getting hit. From our personal perspective, our XPages Migration Service is significantly driven by this movement towards cloud and away from client based infrastructures, and we see this benefiting us. On another note, a lot of our services is to folks who’ve already bought the Lotus platform, not necessarily those who are buying it today. The increase in Social Business is exciting as we have a lot of new capabilities in custom development around IBM Connections and infrastructure maintenance of Connections.
- Workforce Re-balancing. IBM talks a lot about workforce re-balancing as a method of managing their costs and positioning themselves to pursue growth opportunities. Workforce Re-balancing at a macro level concerns us, as one of Maarga’s core capabilities is around our Global Delivery Model. It is always useful to see how the biggies perceive this on an ongoing basis.
IBM seems to be performing very well on key growth initiatives they have, viz: Growth Markets, Analytics, Cloud and Smarter Planet initiatives. On growth markets, but for Brazil there seems to be good performance in other markets. Analytics continues to be a strong suite growing 14% in Q3. Cloud revenue in 3 quarters of 2012 has exceeded 2011 revenue. Smarter Planet has grown at more than 20%. All of these are pure magic for me .. IBM’s ability to target an EPS, define a few growth initiatives and hunker down and pursue them is sheer magic to watch. Seeing IBM loop back and report on the progress of growth initiatives is one of the best lessons on running a company 🙂
- Components of services revenue. Finally, close to my heart is the components of services revenue. Annuities (the holy grail of any services company) is at 50% of IBM’s services revenue. IBM identifies three sources of services revenues:
- Backlog from orders already booked
- New client signings and
- Base growth – Additional business from existing accounts
It is interesting to note that IBM is growing on all these fronts. Seeing IBM quarterly results is like going back to B-School. For all of us – service providers and CIOs alike – there is a lot of learning on how to manage our operations by the numbers, while retaining the soul of the business. What struck you about IBM’s earnings? Please share.