Compared with some previous IBM (IBM) earnings reports that triggered sales, the numbers given in the latest version of Big Blue were not particularly harsh. Even if they (as usual) do not look as solid as they seem at first glance, if you go through the fine print.
The fact that the IBM shares fell by more than 5% after hours could tell the numbers something about the fact that the patience of investors after years of underperforming of IT peers and promising major turnarounds of top and Bottom-line turnaround has become scarce.
IBM reported first quarter revenue of $ 19.07 billion (up 5% per annum) and adjusted EPS of $ 2.45 consensus analyst estimates of $ 1
But they look softer, recalling that IBM's sales growth was boosted by a weak dollar by 5 percentage points-percentage point boost. Growth was constant on a constant basis (CC), which was slightly worse than the 1% CC growth in the 4th quarter and Q4 guidance for Q4 Q4 Q4 growth.
In addition, a very long list of corporate tech companies has released strong reports since January, hoping a little bit that IBM would do the same. Last week, research firm Gartner predicted that global IT spending would rise 6.2% this year – both a weak dollar and spending increases in line with global GDP growth.
In addition, there are disappointments against IBM's Q1 adjusted gross margin (GM): Officially, they fell by 70 basis points per year to 43.7%, falling 30 basis points to 44.1% after restructuring charges for IBM Systems (hardware) were withdrawn. Both figures are below a consensus of 45.1%. Margins have been under pressure for a while from a shift towards cloud revenue streams, but IBM has promised that they will stabilize in 2018.
Outside of lower margins, earnings were impacted by restructuring charges of $ 375 million and a $ 130 million decrease in intellectual property (IP). As expected, EPS benefited from a low adjusted tax rate of 16%. Share repurchases worth $ 800 million were also made up slightly.
With the aforementioned currency surge, 3 of IBM's four product reporting segments outperformed consensus revenue estimates. The exception was the system unit: their sales increased 8% annually (4% in CC) to $ 1.5 billion, with a consensus of $ 1.69 billion missing. While the segment's mainframe revenue grew 59% and power server revenue grew 3% thanks to an ongoing upgrade cycle, storage revenues fell 15%.
CFO Jim Kavanaugh described IBM's storage performance as "disappointing" a mix of competitive, pricing, and sales execution issues. Competitors such as HP Enterprise (HPE) and NetApp (NTAP) report increased storage growth as industry demand benefits from an Intel (INTC) server CPU upgrade cycle.
IBM's Cognitive Solutions segment, which covers much of its software sales and is easily its most profitable unit, saw sales grow 6% in dollars but only 2% in CC. The service segments of the company – Global Business Services (GBS) and Technology Solutions & Cloud Platforms – grew 4% and 5%, respectively, in US dollars. There was a decline of 1% for CC. It should be noted that Gartner expects worldwide spending on enterprise software and IT services to grow by 11.1% and 7.4%, respectively, this year.
There are still some bright spots when you go through the details. With the caveat that they can vary widely from quarter to quarter, IBM's performance increased 10% per year to $ 9.3 billion. This was a nice reversal from the 10% decline in the fourth quarter. The revenue share for the cloud apps, app platform, and infrastructure As-a-Service apps grew 25% annually to $ 10.5 billion. This is an improvement over the growth of 20% in the fourth quarter. IBM also reported (without sales) an increase in security revenues of 60%.
However, the segment's sales figures show that the momentum in areas such as cloud apps / services and security is offset by the pressure of older users – cloud, software, and service companies in areas such as databases, operating systems, consulting, Technical Support and Business Process Outsourcing (BPO). And when you combine the good and the bad, the end result is a company whose currency-adjusted growth is significantly less than that of its growing counterparts such as Microsoft (MSFT), Accenture (ACN), SAP (SAP), and Dell Technologies remains
Investors have certainly not ignored such challenges in recent years, as illustrated by IBM's 5-year chart. But after seeing Big Blue largely miss a 2-year tech rally, and after Berrshire Hathaway of Warren Buffett (BRK.A) has taken out almost all of IBM's stock, it looks like markets are bad news Pardon even less than before
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