Financial Good News and Bad News

IBM Corp. posted its positive third quarter financial results early to ease the markets. Compuware Corp. and SAP AG lowered expectations for their quarterly financial results while Advanced Micro Devices Inc. (AMD) reported it is splitting off its manufacturing operations into a separate company.

Focal Points:

• IBM announced preliminary third quarter revenues of $23.5 billion, up five percent from the same quarter in 2007. Net income on a generally accepted accounting principles (GAAP) basis came in at $2.8 billion or $2.05 per share fully diluted, an increase of 20 percent from the previous year's quarter. Executives stated they expect full year 2008 earnings per share of at least $8.75, or year-to-year growth of 22 percent. The company's gross profit margin in the third quarter was 43.3 percent compared with 41.3 percent in the third quarter of 2007 while its year-to-date free cash flow was approximately $6.4 billion and its cash balance was $9.8 billion.
• Compuware announced its preliminary second quarter financial results. The company expects total revenues of approximately $268, with about $42 million from software licenses, $124 million from maintenance revenues, and $102 million from professional services. Financial analysts were looking for $305 million in revenues for the quarter. On a GAAP basis earnings per share are projected to be about eight cents, well below Wall St. estimates of 13 cents. The COO stated economic volatility delayed sales. Similarly, SAP trimmed its third quarter software revenue outlook to between $1.02 billion and $1.04 billion, an increase of four to five percent from the previous year period. Analysts had been predicting a 20 percent growth. On a GAAP basis the company expects global software-and-services revenues for the third quarter to come in around $2.72 billion, up 13 to 14 percent from a year earlier. Company executives blamed the global financial turmoil for the sudden drop in orders.
• AMD reported it was splitting the company in two, with its manufacturing operations moving to a new company to be owned by AMD and Advanced Technology Investments Co. (ATIC). The new company will temporarily be called the Foundry Co. AMD will own 44.4 percent of the company while ATIC will have 55.6 percent. ATIC is owned by the government of Abu Dhabi. ATIC will shell out $2.1 billion, with $1.4 billion going to the new company and the rest going to AMD, according to officials at AMD.

Experton Group believes the financial crisis will unevenly impact IT providers, with large vendors in the hardware, outsourcing, security, and storage sectors seeing more resiliency than others. Experton Group expects non-critical projects to experience delays, which will impact both large and small vendors. However, companies with diversity of revenues across geographies, and sectors, and a diverse mix of products and services, will have the best chance of weathering the storm. IT executives should re-examine contract commitments, especially volume discount and termination clauses, and negotiate or renegotiate prices and terms that will enable them to reduce their overall spending without impacting the discounts should cutbacks become a corporate reality.

Experton Group believes AMD's intent to focus on innovation and development and its shedding of its fabrication unit will improve its positioning and make it more competitive with Intel Corp. IT executives should be encouraged by this development, as it is important that alternative providers remain in the market. This will ensure innovation remains strong, the chip designers stay nimble, and enterprises have alternative solutions available.