Although I doubt there were many investors still holding serious hope that the first quarter of 2013 was going to end up being a good one for tech companies, IBM (NYSE:IBM) likely snuffed out those hopes with an uncommonly weak quarter. With Big Blue missing for the first time in eight years, and missing across the board, it's pretty clear that business conditions have slowed markedly. Management remains optimistic that business will recover with a strong second half, but even with the big post-earnings decline these shares are not exactly cheap.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments.

Q1 Weak Across The Top Line
IT spending seems to have hit the rocks in the first quarter, and that showed up across all of IBM's business units.

Revenue fell 5% as reported and 3% on a constant currency basis, as IBM missed the average sell-side guess by almost 5%. The company's largest business unit, services, saw revenue down 4% as reported, with a 2% constant currency decline in Global Tech and flat results in Global Business. Software did a little better, with revenue up 1% on a constant currency basis (down 1% reported), but still missed estimates. Last and definitely least, hardware revenue was down 13% excluding a divestiture.

The news didn't get much better in the profit lines. IBM reported a one-point increase in adjusted (non-GAAP) gross margin, and did slightly beat estimates, but adjusted operating income fell 1% and the company missed the sell-side margin target by more than a point. It's worth noting too that this is the first quarterly miss from IBM since the first quarter of 2005.

SEE: Understanding The Income Statement

Can Everybody Screw Up At Once?
The stereotype on Wall Street is that management teams are loathe to admit any fault, usually trying to pass the buck for poor performance on to “market conditions” or “macroeconomic factors”. Curiously, the opposite seems to be true this quarter in the software market. Management at Oracle (Nasdaq:ORCL), TIBCO (Nasdaq:TIBX), Red Hat (NYSE:RHT) and now IBM all cited “sales execution” issues for weak results this quarter, as deals slipped out of the quarter. I have a hard time buying that, and it seems to me that universal sales slippage may in fact be a sign that customers are nervous about the economy and looking to delay major spending decisions until they see business picking up.

Hardware Looking Scary
IBM isn't a perfect bellwether for tech hardware, but these results should still have investors on edge. The company's weak server performance can't be encouraging for other weak hands like Hewlett-Packard (NYSE:HPQ) or Dell (Nasdaq:DELL). Likewise, IBM's 10% decline in storage may point to more share gains for NetApp (Nasdaq:NTAP) and EMC (NYSE:EMC), but I'd argue that it also suggests weak quarters may be on the way for them as well.

On a more positive note, IBM seems to be continuing its policy of evolving with the times and jettisoning low-potential hardware lines. Specifically, management is looking to sell its x86 server business, and it sounds like Lenovo (Nasdaq:LNVGY) may be the company that buys it. Whether that's a good move for Lenovo is a subject for another day, but it's hard not to respect IBM's willingness to punt businesses with weak future prospects when so many other companies cling stubbornly to their legacy operations.

Are Better Days Ahead In Services?
If there was a positive note in IBM's quarter, it was perhaps the datum point that services signings jumped 44% this quarter to almost $17 billion. That's consistent with the results seen at Accenture (NYSE:ACN) and suggests that IBM is still in a good competitive position relative to the likes of Infosys (Nasdaq:INFY), Cognizant (Nasdaq:CTSH) and so on. It's worth mentioning again, though, that IBM is deliberately looking to turn away less desirable business in an effort to improve margins and returns, so the signings/revenue progression could still be a little lumpy (in addition to the “natural” lumpiness resulting from the economic environment).

SEE: A Primer On Investing In The Tech Industry

The Bottom Line
Even with IBM's stock down hard on this disappointing earnings report, it's not close to value territory for me. I believe that the company can continue to grow its free cash flow at a long-term rate close to 5%, but I wouldn't pay more than $180 for that growth right now. What's more, on a relative basis Oracle, Microsoft (Nasdaq:MSFT), and Cisco (Nasdaq:CSCO) all look cheaper than IBM today, leading me to wonder if investors are a little too enamored of buzzwords like “cloud” and “Big Data” when it comes to IBM.

At the time of writing, Stephen D. Simpson owned shares of EMC.

Related Articles
  1. Fundamental Analysis

    Ethical Investing Tutorial

    Learn everything there is to know about ethical investing.
  2. Mutual Funds & ETFs

    The Truth Behind Tactical ETF Investing

    Are tactical ETFs reasonable and effective investment strategies or just plain speculative behavior?
  3. Active Trading

    Value Investing

    Learn everything there is to know about value investing.
  4. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  5. Professionals

    The Best Financial Modeling Courses for Investment Bankers

    Obtain information, both general and comparative, about the best available financial modeling courses for individuals pursuing a career in investment banking.
  6. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  7. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  8. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  9. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  10. Technical Indicators

    Using Pivot Points For Predictions

    Learn one of the most common methods of finding support and resistance levels.
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>

You May Also Like

Trading Center