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IBM Corp (IBM) Beats on Q4 Earnings; FY17 View Positive
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International Business Machines Corp (IBM - Free Report) reported fourth-quarter 2016 non-GAAP earnings of $5.01 per share, which increased 3.5% from the year-ago quarter and 52.3% sequentially. Further, earnings beat the Zacks Consensus Estimate by 12 cents (2.5%).
Revenues of $21.77 billion comfortably surpassed the Zacks Consensus Estimate of $21.58 billion and increased 13.2% sequentially. However, after a brief improvement in the previous quarter, revenues again declined on a year-over-year basis. Strong U.S. dollar impacted revenues by $300 million.
IBM has been moving away from its traditional businesses to newer (read lucrative) business avenues like cloud and data analytics. Though IBM’s Strategic Imperatives are performing well, the modest 1.3% revenue decline exhibited that these are not sufficient to suffice for the weakness in its traditional businesses yet.
International Business Machines Corp. Price and Consensus
Shares fell 2.34% in after-hour trading following the fourth-quarter announcement. Despite the quarterly beat we do not expect shares to rebound in the near-term due to the weakness in revenue growth rate.
We note that IBM has underperformed the Zacks Computer Integrated Systems industry in the last one year. While the industry generated returns of 47.3%, IBM shares gained 35.7% in the same time period.
Segment Revenue Details
Total software revenues increased 1% year over year to $7 billion. While operating systems continued to decline, cognitive solutions and integration software increased in the quarter. Software annuity revenue was up mid-single digits, led by strong performance from SaaS offerings. IBM’s software transaction revenue declined mid-single digits.
Cognitive Solutions (solutions software and transaction processing software) revenues grew 1.4% on a year-over-year basis (up 2.2% at constant currency) to $5.30 billion. IBM reported that solutions software revenues grew, while transaction processing software declined.
Solutions software growth was driven primarily by analytics (Watson platform, Big Data, Information Integration). Cloud was up an impressive 33%. Acquisitions continue to cushion growth.
Revenues from Global Business Services (includes consulting, global process services, application management) segment were $4.12 billion, down 4.1% (3.6% at constant currency). Segmental revenues pertaining to Strategic Imperatives grew 19%. Cloud practice was up over 70%, mobile nearly 30%, and analytics was up 10% in the reported quarter.
Revenues from Technology Services and Cloud Platforms (includes infrastructure services, technical support services, integration software) increased 1.7% (up 2.4% at constant currency) to $9.31 billion. Segmental revenues pertaining to Strategic Imperatives advanced 35%, driven by robust performance from hybrid cloud (up 50%).
IBM now has more than 50 cloud centers globally. Infrastructure services grew 3%, while technical support services were flat on a year-over-year basis. Integration software grew this quarter, owing to momentum in hybrid cloud integration capabilities and WebSphere Application Server. IBM noted that the Bluemix platform has grown rapidly to become one of the largest open public cloud deployments globally.
Systems (systems hardware and operating systems software) segment fell 12.5% on a year-over-year basis (down 12.1% at constant currency) to $2.53 billion.
Global Financing (includes financing and used equipment sales) revenues declined 1.5% (down 2.1% at constant currency) to $447 million.
Strategic Imperatives
In 2016, IBM’s strategic imperatives (cloud, analytics, mobility and security) revenues increased 13% (up 14% at constant currency). Cloud revenues increased 35% to $13.7 billion. The annual exit run rate for cloud as-a-service revenue increased 61% (up 63% at constant currency) on a year-over-year basis.
Revenues from analytics increased 9%. Revenues from mobile increased 34% (up 35% at constant currency) and from security increased 13% (up 14% at constant currency).
Expanding Watson Offerings
IBM continues to expand Watson offerings. During the quarter, the company introduced new offerings, like the Watson Data Platform, Watson Discovery Service and trade surveillance for Financial Services. Further, the company added new cognitive capabilities for conversation to Watson.
The platform has achieved strong as noted by management. API calls increased signficantly on a year-over-year basis as companies Bradesco adopted the platform.
In the quarter, IBM announced a partnership with General Motors (GM - Free Report) that combines the power of Onstar and Watson together to create the auto industry’s first cognitive mobility platform. The company also announced that IBM MobileFirst for iOS applications can now be integrated Watson capabilities to increase the productivity and improve decision making for enterprise employees.
Healthcare has been a major growth area for Watson. The platform is now helping over 45 million people worldwide through its presence in oncology & genomics, government, life sciences, value based care & imaging. Moreover, partnerships with the likes of Quest Diagnostics (DGX - Free Report) and Illumina (ILMN - Free Report) are anticipated to expand Watson’s presence in the Genomics market.
IBM stated that through its partners Watson’s genomic analysis will be made available to oncologists who treat 70% of cancer patients in the U.S.
Moreover, IBM launched new Watson IoT solutions for industries like manufacturing and insurance. Collaboration with the likes of BMW is expected to drive growth in the Internet of Things (IoT) market going forward.
Margins
Non-GAAP gross margin contracted 180 basis points (bps) to 51% from the year-ago quarter. Pre-tax margin from continuing operations also contracted 20 bps on a year-over-year basis to 24.8%.
Segment wise, Cognitive Solutions pre-tax margin contracted almost 370 bps. The year-over-year contraction reflected increased investment levels and expenditure related to SaaS ramp.
Global Business Services pre-tax margin contracted 380 bps due to lower productivity as the company transits towards digital businesses from traditional practices like ERP.
Technology Services and Cloud Platforms pre-tax margin expanded 50 bps.
Systems pre-tax margin contracted 40 bps.
Balance Sheet & Cash Flow Details
IBM ended fourth-quarter 2016 with $8.53 billion in total cash and marketable securities as compared with $10 billion at the end of third-quarter 2016. Total debt (including global financing) was $42.2 million, which declined from $42.5 billion at the end of last quarter. Core (excluding global financing) debt was $14.3 billion, which also fell from $16.4 billion.
IBM reported cash flow from operations (excluding Global Financing receivables) of $3.2 billion and generated free cash flow of $4.7 billion in the quarter. The free cash flow figure was better than free cash flow of $2.4 billion generated in the previous quarter. However, cash flow from operations declined slightly from $3.3 billion reported in the previous quarter.
In 2016, IBM generated free cash flow of $11.6 billion (excluding Global Financing receivables). The company returned $8.8 billion to shareholders through $5.3 billion in dividends and $3.5 billion of share repurchases. At the end of the year the company had $5.1 billion remaining under its current buyback authorization.
IBM spent $5.7 billion on 15 acquisitions in 2016, of which three were completed in the fourth-quarter.
Guidance
For full-year 2017, IBM forecasts non-GAAP earnings to be at least $13.80. Further, the company anticipates generating free cash flow in excess of 90% of GAAP net income.
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IBM Corp (IBM) Beats on Q4 Earnings; FY17 View Positive
International Business Machines Corp (IBM - Free Report) reported fourth-quarter 2016 non-GAAP earnings of $5.01 per share, which increased 3.5% from the year-ago quarter and 52.3% sequentially. Further, earnings beat the Zacks Consensus Estimate by 12 cents (2.5%).
Revenues of $21.77 billion comfortably surpassed the Zacks Consensus Estimate of $21.58 billion and increased 13.2% sequentially. However, after a brief improvement in the previous quarter, revenues again declined on a year-over-year basis. Strong U.S. dollar impacted revenues by $300 million.
IBM has been moving away from its traditional businesses to newer (read lucrative) business avenues like cloud and data analytics. Though IBM’s Strategic Imperatives are performing well, the modest 1.3% revenue decline exhibited that these are not sufficient to suffice for the weakness in its traditional businesses yet.
International Business Machines Corp. Price and Consensus
International Business Machines Corp. Price and Consensus | International Business Machines Corp. Quote
Shares fell 2.34% in after-hour trading following the fourth-quarter announcement. Despite the quarterly beat we do not expect shares to rebound in the near-term due to the weakness in revenue growth rate.
We note that IBM has underperformed the Zacks Computer Integrated Systems industry in the last one year. While the industry generated returns of 47.3%, IBM shares gained 35.7% in the same time period.
Segment Revenue Details
Total software revenues increased 1% year over year to $7 billion. While operating systems continued to decline, cognitive solutions and integration software increased in the quarter. Software annuity revenue was up mid-single digits, led by strong performance from SaaS offerings. IBM’s software transaction revenue declined mid-single digits.
Cognitive Solutions (solutions software and transaction processing software) revenues grew 1.4% on a year-over-year basis (up 2.2% at constant currency) to $5.30 billion. IBM reported that solutions software revenues grew, while transaction processing software declined.
Solutions software growth was driven primarily by analytics (Watson platform, Big Data, Information Integration). Cloud was up an impressive 33%. Acquisitions continue to cushion growth.
Revenues from Global Business Services (includes consulting, global process services, application management) segment were $4.12 billion, down 4.1% (3.6% at constant currency). Segmental revenues pertaining to Strategic Imperatives grew 19%. Cloud practice was up over 70%, mobile nearly 30%, and analytics was up 10% in the reported quarter.
Revenues from Technology Services and Cloud Platforms (includes infrastructure services, technical support services, integration software) increased 1.7% (up 2.4% at constant currency) to $9.31 billion. Segmental revenues pertaining to Strategic Imperatives advanced 35%, driven by robust performance from hybrid cloud (up 50%).
IBM now has more than 50 cloud centers globally. Infrastructure services grew 3%, while technical support services were flat on a year-over-year basis. Integration software grew this quarter, owing to momentum in hybrid cloud integration capabilities and WebSphere Application Server. IBM noted that the Bluemix platform has grown rapidly to become one of the largest open public cloud deployments globally.
Systems (systems hardware and operating systems software) segment fell 12.5% on a year-over-year basis (down 12.1% at constant currency) to $2.53 billion.
Global Financing (includes financing and used equipment sales) revenues declined 1.5% (down 2.1% at constant currency) to $447 million.
Strategic Imperatives
In 2016, IBM’s strategic imperatives (cloud, analytics, mobility and security) revenues increased 13% (up 14% at constant currency). Cloud revenues increased 35% to $13.7 billion. The annual exit run rate for cloud as-a-service revenue increased 61% (up 63% at constant currency) on a year-over-year basis.
Revenues from analytics increased 9%. Revenues from mobile increased 34% (up 35% at constant currency) and from security increased 13% (up 14% at constant currency).
Expanding Watson Offerings
IBM continues to expand Watson offerings. During the quarter, the company introduced new offerings, like the Watson Data Platform, Watson Discovery Service and trade surveillance for Financial Services. Further, the company added new cognitive capabilities for conversation to Watson.
The platform has achieved strong as noted by management. API calls increased signficantly on a year-over-year basis as companies Bradesco adopted the platform.
In the quarter, IBM announced a partnership with General Motors (GM - Free Report) that combines the power of Onstar and Watson together to create the auto industry’s first cognitive mobility platform. The company also announced that IBM MobileFirst for iOS applications can now be integrated Watson capabilities to increase the productivity and improve decision making for enterprise employees.
Healthcare has been a major growth area for Watson. The platform is now helping over 45 million people worldwide through its presence in oncology & genomics, government, life sciences, value based care & imaging. Moreover, partnerships with the likes of Quest Diagnostics (DGX - Free Report) and Illumina (ILMN - Free Report) are anticipated to expand Watson’s presence in the Genomics market.
IBM stated that through its partners Watson’s genomic analysis will be made available to oncologists who treat 70% of cancer patients in the U.S.
Moreover, IBM launched new Watson IoT solutions for industries like manufacturing and insurance. Collaboration with the likes of BMW is expected to drive growth in the Internet of Things (IoT) market going forward.
Margins
Non-GAAP gross margin contracted 180 basis points (bps) to 51% from the year-ago quarter. Pre-tax margin from continuing operations also contracted 20 bps on a year-over-year basis to 24.8%.
Segment wise, Cognitive Solutions pre-tax margin contracted almost 370 bps. The year-over-year contraction reflected increased investment levels and expenditure related to SaaS ramp.
Global Business Services pre-tax margin contracted 380 bps due to lower productivity as the company transits towards digital businesses from traditional practices like ERP.
Technology Services and Cloud Platforms pre-tax margin expanded 50 bps.
Systems pre-tax margin contracted 40 bps.
Balance Sheet & Cash Flow Details
IBM ended fourth-quarter 2016 with $8.53 billion in total cash and marketable securities as compared with $10 billion at the end of third-quarter 2016. Total debt (including global financing) was $42.2 million, which declined from $42.5 billion at the end of last quarter. Core (excluding global financing) debt was $14.3 billion, which also fell from $16.4 billion.
IBM reported cash flow from operations (excluding Global Financing receivables) of $3.2 billion and generated free cash flow of $4.7 billion in the quarter. The free cash flow figure was better than free cash flow of $2.4 billion generated in the previous quarter. However, cash flow from operations declined slightly from $3.3 billion reported in the previous quarter.
In 2016, IBM generated free cash flow of $11.6 billion (excluding Global Financing receivables). The company returned $8.8 billion to shareholders through $5.3 billion in dividends and $3.5 billion of share repurchases. At the end of the year the company had $5.1 billion remaining under its current buyback authorization.
IBM spent $5.7 billion on 15 acquisitions in 2016, of which three were completed in the fourth-quarter.
Guidance
For full-year 2017, IBM forecasts non-GAAP earnings to be at least $13.80. Further, the company anticipates generating free cash flow in excess of 90% of GAAP net income.
Zacks Rank
IBM currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
The Best Place to Start Your Stock Search
Today, you are invited to download the full list of 220 Zacks Rank #1 "Strong Buy" stocks – absolutely free of charge. Since 1988, Zacks Rank #1 stocks have nearly tripled the market, with average gains of +26% per year. Plus, you can access the list of portfolio-killing Zacks Rank #5 "Strong Sells" and other private research. See these stocks free >>