IBM Earnings & Revenues Beat Estimates in Q4, Rise Y/Y

International Business Machines Corp IBM reported overwhelming fourth-quarter 2017 results wherein its revenues increased year-over-year for the first time after 22 quarters of consecutive decline.

The company reported fourth-quarter non-GAAP earnings of $5.18 per share, which beat the Zacks Consensus Estimate by a penny. Earnings per share (EPS) was better than the year-ago figure by 3.4% and surged 56.9% sequentially.

Revenues of $22.54 billion surpassed the Zacks Consensus Estimate of $21.96 billion and increased 3.5% on a year-over-year basis. At constant currency (cc), revenues grew 1%. Moreover, revenues increased 17.7% sequentially.

The top-line performance was better than expected primarily owing to higher cognitive solutions and systems revenues. Cognitive revenues were driven by robust performance from security, Internet of Things (IoT) and analytics offerings. Systems benefited from strong demand for storage and the launch of new z14 mainframe.

Moreover, Strategic Imperatives (cloud, analytics, mobility and security) grew 14% at cc from the year-ago quarter. On a trailing 12-month basis, revenues increased 11% to $36.5 billion and now represents 46% (up from 45% in the previous quarter) of the company’s total revenues.

Geographically, revenues from Americas increased 4% year over year, driven by growth across the United States, Canada and Brazil. Meanwhile, Europe/Middle-East/Africa (EMEA) revenues declined 1.5%. Management noted year-over-year growth in France, Middle East and Africa, and Spain, was partially offset by declines in UK, Italy and Germany. Asia-Pacific revenues inched up 4%, driven by robust growth in Japan and China.

IBM’s stock has lost 0.84% of its value over the past year, narrower than the industry’s decline of 6.24%.

Cloud & Security Drove Top-line Growth

Cloud revenues surged 27% on a cc basis from the year-ago quarter. The annual run rate for cloud as-a-service revenues increased 19.8% at cc on a year-over-year basis to $10.3 billion. Cloud revenues on a trailing 12-month basis are now $17 billion, more than 20% of the company’s total revenues.

Security revenues have surged 127% at cc basis to $1.5 billion. Growth was driven by robust performance from security software solutions and strong demand for the pervasive encryption capabilities in new z14 mainframe.

Revenues from analytics (largest of the company’s strategic imperatives) increased 6% at cc to $6.1 billion. Revenues from mobile climbed 21% at cc to $1.3 billion.

Cognitive Solutions Grew on Security, Analytics

Cognitive Solutions (solutions software and transaction processing software) revenues increased 3% on reported basis and flat at cc to $5.4 billion. The figure almost matched the Zacks Consensus Estimate for Cognitive Solutions of $5.48 billion. The transactional revenue within solutions was down, primarily due to weakness in traditional analytics offerings (which includes data integration and content management).

Transaction processing software during the quarter increased 3% year over year.

Solutions software revenues showed signs of improvement mainly owing to continued focus on building industry verticals and robust performances in areas like Watson Health, Watson Financial Services and Watson IoT offerings.

Within Annuity content (80% of cognitive), Software-as-a-Service (SaaS) offerings witnessed double-digit growth in revenues and signings.

Analytics results improved on the back of strong growth in Business Intelligence & Data Discovery. Data Warehousing reported strong results. In September, IBM launched new unified data system, which is supported by its DB2 technology and is built on IBM Power.

Segmental revenues pertaining to Strategic Imperatives were down 3% year over year, while Cloud grew 6%. Cloud as-a-service revenue annual run rate was $2.1 billion.

Security software grew double digits in the reported quarter driven by robust sales of Resilient and QRadar, which addresses areas like endpoint protection, incident response and security intelligence.

IBM stated that increasing number of security threats, growing regulatory compliance like General Data Protection Regulation (GDPR) drove strong demand for its security offerings.

Watson Health continued to drive double-digit growth, with strength in Government, Oncology and Life Sciences markets.

GBS — Consulting Grew, Application Management Down

Revenues from Global Business Services segment were $4.2 billion, down 2% at cc. The figure was marginally better than the Zacks Consensus Estimate of $4.1 billion. Signings improved for the fourth-consecutive quarter. Segmental revenues pertaining to Strategic Imperatives grew 7%. Cloud practice surged 17%. Cloud as-a-service revenues annual run rate was $1.3 billion.

Application Management and Global Process Services revenues decreased 3% and 8%, respectively. Consulting revenues increased 1% driven by IBM’s digital strategy and iX platform, which is up around 40%.

During the quarter, IBM signed a partnership with Blue Prism to combine latter’s robotics processing automation software with IBM services in order to deliver digital workforce solutions.

Technology Services & Cloud Platforms: Revenues Dip

Revenues from Technology Services & Cloud Platforms decreased 4% at cc to $9.2 billion, which matched the Zacks Consensus Estimate.

Segmental revenues pertaining to Strategic Imperatives advanced 12%, driven by hybrid cloud services, security and mobile. Cloud increased 10% from the year-ago quarter. Cloud as-a-service revenues annual run rate was $6.9 billion.

Integration Software, Technical Support Services and Infrastructure Services dipped 5%, 2% and 4%, respectively.

Mainframe, Storage Drove Systems Revenues

Systems (systems hardware and operating systems software) segment increased 28% at cc on a year-over-year basis to almost $3.3 billion. The increase can primarily be attributed to growth in IBM Z, Power Systems and storage.

IBM Z revenues grew 71% year over year on 33% MIPS growth driven by the successful launch of the new z14 mainframe. The company began shipment of its z14 mainframe in September last year. The company added 14 new clients to Z platform across 10 countries during the quarter.

Moreover, the company witnessed better-than-expected growth in North America. IBM is also recognized as a dominant player in the blockchain market. The company addresses new capabilities across this platform like blockchain, machine learning, DevOps and payments.

IBM concluded 10 instant payments deals during the quarter. Further, expanding its dominance in blockchain market, the Beijing Institute of Technology selected the IBM LinuxONE platform to run their blockchain solution.

Power revenues increased year over year primarily attributed to growth in Linux market.

Segmental revenues pertaining to Strategic Imperatives and Cloud surged 25%, each, year over year.

Storage hardware grew 8% in the quarter. Operating Systems Software revenues were flat year over year, while Systems Hardware increased 35% from the year-ago quarter.

Global Financing (includes financing and used equipment sales) revenues decreased 2% at cc to $450 million.

Blockchain Initiatives Gaining Momentum

IBM is involved in a number of blockchain initiatives as the technology gains rapid mainstream adoption. The company is currently the dominant player in the blockchain market. Recently, CNBC quoted Juniper Research, which placed IBM above Microsoft Corporation MSFT in blockchain-related advancements.

It uses hyperledger technology for its blockchain applications and is also a key member of the Hyperledger committee. This enables the company to gain access to prior notification of any changes in the underlying infrastructure.

The company has been winning significant deals in recent times. The company has been involved in blockchain projects with plenty of clients since the release of its blockchain platform in the last quarter. It has collaborated on 35 active networks with clients such as CLS, Everledger, KBank, London Stock Exchange and Mizuho.

During the quarter, IBM also joined forces with the largest container shipping firm in the world, A.P. Moller-Maersk. The partnership is intended to deliver a secure and efficient industry-wide trading platform using blockchain technology.

Further, this platform will deliver much needed innovation in the ocean shipping industry and aid IBM in expanding foothold in this space.

Margins

Non-GAAP gross margin contracted 150 basis points (bps) to 49.5% from the year-ago quarter. Sequentially, gross margin expanded 190 bps reflecting some improvement from mix and from productivity.
Operating expense increased 6% year over year to $6.05 billion reflecting currency fluctuation and lower level of IP income.
Moreover, pre-tax margin from continuing operations contracted 210 bps on a year-over-year basis to 22.7%. Sequentially, pre-tax margin expanded 390 bps.

Segment wise, Cognitive Solutions, Global Business Services and Technology Services & Cloud Platforms pre-tax margin contracted 110 bps, 450 bps and 420 bps, respectively. This was partially offset by 430 bps expansion in Systems pre-tax margin.

Balance Sheet & Cash Flow Details

IBM ended fourth-quarter 2017 with $12.580 billion in total cash and marketable securities as compared with $11.50 billion at the end of third-quarter 2017. Total debt (including global financing) was $39.8 billion as compared with $45.6 million reported in the last quarter.

IBM reported cash flow from operations (excluding Global Financing receivables) of $5.7 billion and generated free cash flow of $6.8 billion in the quarter. In the reported quarter, the company returned $2.1 billion to shareholders through dividends ($1.4 billion) and share repurchases ($0.7 billion). At the end of the quarter, the company had $3.8 billion remaining under current buyback authorization.

Guidance

IBM provides EPS forecast for 2018. Non-GAAP EPS is anticipated to be at least $13.80. The Zacks Consensus Estimate for earnings is pegged at $13.86 per share.

Zacks Rank & Key Picks

IBM currently carries a Zacks Rank #3 (Hold).

Analog Devices, Inc. ADI and STMicroelectronics N.V. STM are better-ranked stocks in the broader technology sector, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

 

Analog Devices and STMicroelectronics have a long-term earnings growth rate of 10.4% and 5%, respectively.

 

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