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April 20, 2012

'Big Tech' Earnings Week Ends - Reading the IBM, Verizon and Microsoft Tea Leaves

By Peter Bernstein, Senior Editor

TGIF! It has been a hectic week on the technology earnings front, so with the end of it, it seems like a good time to take stock.  

Therefore, it might be interesting from a slightly different than totally financial perspective, to see if there were any dots to be connected from what can best be characterized as the week the empires struck back.

The scorecard

Given that all three companies beat financial analyst expectations, in case you missed the hits from these three shows below is a synopsis. Click on the links to the releases or visit the investor relations sections of each company’s Web site for details.


Beat street estimates on net income which rose 7 percent to $3.07 billion, but revenues of $24.67 billion were stagnant and fell just short analyst’s estimates.

In the first quarter for new CEO, Virginia Rometty, the company kept shedding lower margin businesses (hardware sales fell 7 percent) while racking up impressive numbers in higher-margin ones like software (which is 43 percent of the company’s profits). As the earnings release notes, they showed impressive market penetration in various business units in the key India and China markets. The $15 billion in services revenue (representing 57 percent of company revenues) was basically flat.

IBM even had the audacity to raise its guidance on EPS from $14.85 to at least $15.00 per share. This is the face of Gartner Group lowering its projection for annual technology purchases worldwide, and warnings this week from International Monetary Fund (IMF) chief Christine Lagarde’s warning of dark clouds on the horizon for the global economy.

Verizon (News - Alert)

Beat street estimated with overall net income was $1.69 billion, or 59 cents per share, in the first three months of 2012, beating the average forecast by a penny per share. It was up from $1.44 billion, or 51 cents per share, a year ago.

Revenue rose 4.6 percent to $28.2 billion from $27 billion a year ago, meeting expectations. 

Wireless revenues grew 7.7 percent year over year, driven largely by iPhone sales. The rest of the results for wireless in the earnings announcement were all good news with the company’s lead in deployment of 4G LTE (News - Alert) helping it growth its base, cut churn and increase watch its data revenue business (driven by those smartphone sales) explode. 

On the wired side of the house the business continues to struggle from a revenue and margin perspective, a reflection that with 5 million customers connected to higher margin FiOS (News - Alert) broadband Internet and entertainment services, the migration of the rest of the vast Verizon base to broadband has a ways to go. Mostly because of the lack of network coverage, and partly because of very stiff competition from cable and satellite companies.  

Microsoft (News - Alert)

Beat reports a decline in net income to $5.11 billion – 60 cents a share – compared with $5.23 billion – 61 cents a share – in the same period last year. However, that decline was mainly due to a tax benefit of $461 million that Microsoft got last year, without which net income would have increased year over year. Revenue rose to $17.41 billion, from $16.43 billion a year ago.

Overall performance, as seen in the earnings release, was strong as can seen in selected business unit results:

The Server & Tools business posted $4.57 billion in third-quarter revenue, a 14-percent increase from the prior year period, driven by double-digit revenue growth in SQL Server and more than 20 percent growth in System Center revenue.

The Microsoft Business Division reported $5.81 billion in third-quarter revenue, a 9-percent increase from the prior year period, reflecting the continued strength of Office 2010 with businesses and consumers. Dynamics posted an 11-percent revenue increase from the prior year period, with Dynamics CRM revenue growing more than 30 percent.

The Windows and Windows Live Division posted revenue of $4.62 billion, a 4-percent increase from the prior year period. Strong Windows 7 adoption continued with enterprise desktops on Windows 7 now up to 40 percent worldwide.

Despite there being invigorating life in Windows and Office in enterprises there were some issues. The company continues to struggle in such critical areas as mobile/wireless, the games business is slowing, Internet Explorer is about to lose its position as the #1 browser, and Bing is a very distant competitor in search and losing gobs of money. 

Are there patterns?

A few observations are in order when stepping back to examine these three behemoths.

First, none of them simply beat Wall Street’s financial expectations. They also each turned some heads in areas where they have had criticism from skeptics. IBM’s software business, for example, is excelling despite competition from Accenture (News - Alert) and HP, and strategically it is not only well-positioned but seems to have the confidence of IT buyers that it is safe to buy IBM for things like big data, analytics, moving to the cloud and business process transformation. 

Verizon has shown that it is possible to increase ARPU in wireless despite the naysayers and that those 40 million subscriptions that are due over the next months are likely to stay put and be quite profitable as people stay with Verizon because of its LTE advantage and continue to consume vast quantities of data. As for Microsoft, why anyone wrote them off in the first place given their strength in the enterprise at the desktop and server software level, in addition to what seems to be a nice move into the cloud with Windows, is a mystery to me. 

Next up: the two big IT companies are big beneficiaries of all of the big trends impacting corporate IT while the communications company is succeeding mostly because of its consumer businesses and will ride the consumerization of IT trend via the BYOD phenomena as far as they can. Indeed, there is a strange irony in how the stock market rewarded Verizon for strong iPhone sales, but is busy punishing Apple based on those same sales results as analysts look at the Verizon numbers and think Apple’s earnings next week may not live up to expectations. 

It must be noted that people like to stick with the familiar. This is true in terms of brands, support people, training and the hassles of changing vendors. We keep hearing that trust is what really matters in all markets. As enterprises look to customer experience transformation as their differentiated value they recognize that all of the complex things that go on behind the curtain to make that happen are going to require partners with deep technical expertise and world-class support.

That is a short list and IBM and Microsoft are at the top of most people’s short lists. Verizon has emerged as a trust brand for providing a major wireless experience.   Now that they have decided to ditch DSL in favor of FiOS deployments if they can continue to invest in an accelerated build-out, they can not only position themselves well in the consumer triple and probable quadruple play markets, but cement a more than “dub pipe” roll in such areas as M2M solutions and smart grids.

Finally, in an uncertain world, companies widely held and pay a dividend are to use a term from above “safe harbors.” Their stability is what makes them attractive in several respects: investors, consumers, enterprise customers, business partners and ecosystem stakeholders. Solid is the new sexy. 

We shall see if that statement can last through next week. In the mean time have a cup of tea and enjoy the weekend.

Edited by Braden Becker
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