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Why Is IBM Down 6.7% Since the Last Earnings Report?
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It has been about a month since the last earnings report for International Business Machines Corporation (IBM - Free Report) . Shares have lost about 6.7% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock’s next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Recent Earnings
IBM reported first-quarter 2017 non-GAAP earnings of $2.38 per share, which increased 1.3% from the year-ago quarter and beat the Zacks Consensus Estimate by $0.04 (1.7%).
Revenues of $18.16 billion missed the Zacks Consensus Estimate of $18.49 billion and decreased 2.8% year over year and 16.6% sequentially.
Strategic Imperatives
In the first quarter, IBM’s strategic imperatives (cloud, analytics, mobility and security) revenues increased 12% (up 13% at constant currency) to $7.8 billion. Cloud revenues increased 35% to $3.5 billion. The annual exit run rate for cloud as-a-service revenue increased 59% (up 61% at constant currency) on a year-over-year basis to $8.6 billion.
Revenues from analytics (largest of the company’s strategic imperatives) increased 7%. Revenues from mobile increased 20% (up 35% at constant currency) and from security increased 10% (up 14% at constant currency).
Segment Revenue Details
Cognitive Solutions (solutions software and transaction processing software) revenues grew 2.1% on a year-over-year basis (up 2.8% at constant currency) to $4.06 billion. IBM reported that solutions software revenues grew 5%, while transaction processing software declined 1%.
Solutions software growth was driven primarily by analytics (Watson platform, Big Data, Information Integration). The company stated that good growth in on-premise databases and data warehousing, which includes DB2, Informix and Netezza drove growth in analytics. Content and integration offerings were also up in the quarter.
Segmental revenues pertaining to Strategic Imperatives and Cloud grew 7% and 45%, respectively.
Revenues from Global Business Services (includes consulting, global process services, application management) segment were $4 billion, down 3% (down 1.9% at constant currency). Segmental revenues pertaining to Strategic Imperatives grew 13%. Cloud practice surged 57%.
Revenues from Technology Services and Cloud Platforms (includes infrastructure services, technical support services, integration software) decreased 2.5% (down 2% at constant currency) to $8.21 billion. Segmental revenues pertaining to Strategic Imperatives advanced 31%, on the back of robust performance from hybrid cloud (up 42%).
IBM now has more than 50 cloud centers globally. Both Infrastructure services and technical support services declined 2%, respectively. Integration software dipped 3% this quarter, owing to lower on-premises DevOps tools and IT services management software revenues. IBM noted that the Bluemix platform continued to expand in the reported quarter.
Systems (systems hardware and operating systems software) segment fell 16.7% on a year-over-year basis (down 12.1% at constant currency) to almost $1.40 billion. The decline primarily reflects lower z Systems and Power revenues.
IBM added seven new z systems clients in the quarter. The company anticipates launching a new mainframe late in 2017.
Power revenues declined due to IBM’s transition to a growing Linux market from declining UNIX. Workloads on Linux grew double-digit, outpacing the market in the quarter. The company noted that it has 3% market share, which presents significant growth opportunity.
Storage hardware was up 7% backed by double-digit growth in all-flash array offerings. Software defined storage revenues grew double-digit. Storage software now represents more than 40% of total storage revenue.
Global Financing (includes financing and used equipment sales) revenues slipped 1.2% (down 2.1% at constant currency) to $405 million.
Expanding Watson Offerings
IBM continues to expand Watson offerings. During the quarter, IBM entered into partnerships with the likes of Visa, Samsung, H&R Block, AT&T, Harry & David, Charlotte Russe, Performance Bicycle and others. The company added 50 new clients to Watson IoT Platform in the quarter.
The company has inked a partnership with salesforce.com, which will result in integration of Watson-Einstein. The collaboration will provide an insight on huge amount of data specifically related to the fields of health care, financial services and retail, which will boost footprint in the rapidly growing artificial intelligence (AI) market.
IBM Watson on Cloud is a key growth driver in IoT, healthcare and financial services end-markets. IBM Watson is anticipated to reach more than 1 billion people by the end of 2017. Per the IBM Investor Briefing 2017, the company estimates the market for Watson on Cloud as a decision making support system to be worth nearly $2 trillion by 2025.
During the quarter, IBM signed a collaboration agreement with China’s Wanda Internet Technology Group to provide Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS) to Chinese enterprises and businesses through a new company. Reportedly, IBM will have a share in revenues.
We also note that Blockchain initiatives, Quantum computing and Containers are some of the other catalysts that will support IBM’s growth trajectory going ahead. Notably, in Blockchain, IBM won 40 new contracts in the quarter. The company is now working on more than 400 Blockchain processes with customers like Maersk, Northern Trust and others.
IBM announced the first commercial quantum systems during the quarter. The company also launched new cognitive offerings such as Watson Imaging Clinical Review. Further, cognitive capabilities were added to applications like Watson Care Manager.
Margins
Non-GAAP gross margin contracted 300 basis points (bps) to 44.5% from the year-ago quarter. However, pre-tax margin from continuing operations expanded 410 bps on a year-over-year basis to 11.4%.
Segment wise, Cognitive Solutions, Global Business Services and Technology Services and Cloud Platforms pre-tax margin expanded 590 bps, 270 bps and 530 bps, respectively.
Systems pre-tax loss was $186 million much wider than loss of $10 million reported in the year-ago quarter.
Balance Sheet & Cash Flow Details
IBM ended first-quarter 2017 with $10.70 billion in total cash and marketable securities as compared with $8.53 billion at the end of fourth-quarter 2016. Total debt (including global financing) was $42.8 million, which increased from $42.2 billion at the end of last quarter. Core (excluding global financing) debt was $14.3 billion, flat on a sequential basis.
IBM reported cash flow from operations (excluding Global Financing receivables) of $4 billion and generated free cash flow of $1.1 billion in the quarter. The free cash flow figure was lower than free cash flow of $2.4 billion generated in the previous quarter, which included Japan tax refund. However, cash flow from operations increased slightly from $3.2 billion reported in the previous quarter.
In the reported quarter, IBM returned $2.6 billion to shareholders through dividends ($1.3 billion) and share repurchases ($1.3 billion). At the end of the quarter, the company had $3.8 billion remaining under its current buyback authorization.
Guidance
IBM reiterated forecasts for full-year 2017. Non-GAAP earnings are expected to be at least $13.80. The company continues to anticipate generating free cash flow in excess of 90% of GAAP net income.
IBM expects profitability to improve in second-half 2017 based on a number of factors. New system product launches are anticipated to boost gross profit. Further, lower spending on systems development will boost profitability.
Moreover, less dilutive effect of acquisitions, closure of pending contracts in the Global Technology Services segment, improving outlook for the Global Business Services segment and cost savings are expected to drive results in the latter half of 2017.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been seven downward revisions for the current quarter. In the past month, the consensus estimate also shifted downward by 13.6% due to these changes.
International Business Machines Corporation Price and Consensus
At this time, IBM's stock has a strong Growth Score of 'A', though it is lagging a lot on the momentum front with a 'D'. However, the stock was allocated a grade of 'A' on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks' style scores indicate that the stock is suitable for value and growth investors.
Outlook
Estimates have been broadly trending downward for the stock. The magnitude of these revisions also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #4 (Sell). We are looking for a below average return from the stock in the next few months.
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Why Is IBM Down 6.7% Since the Last Earnings Report?
It has been about a month since the last earnings report for International Business Machines Corporation (IBM - Free Report) . Shares have lost about 6.7% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock’s next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Recent Earnings
IBM reported first-quarter 2017 non-GAAP earnings of $2.38 per share, which increased 1.3% from the year-ago quarter and beat the Zacks Consensus Estimate by $0.04 (1.7%).
Revenues of $18.16 billion missed the Zacks Consensus Estimate of $18.49 billion and decreased 2.8% year over year and 16.6% sequentially.
Strategic Imperatives
In the first quarter, IBM’s strategic imperatives (cloud, analytics, mobility and security) revenues increased 12% (up 13% at constant currency) to $7.8 billion. Cloud revenues increased 35% to $3.5 billion. The annual exit run rate for cloud as-a-service revenue increased 59% (up 61% at constant currency) on a year-over-year basis to $8.6 billion.
Revenues from analytics (largest of the company’s strategic imperatives) increased 7%. Revenues from mobile increased 20% (up 35% at constant currency) and from security increased 10% (up 14% at constant currency).
Segment Revenue Details
Cognitive Solutions (solutions software and transaction processing software) revenues grew 2.1% on a year-over-year basis (up 2.8% at constant currency) to $4.06 billion. IBM reported that solutions software revenues grew 5%, while transaction processing software declined 1%.
Solutions software growth was driven primarily by analytics (Watson platform, Big Data, Information Integration). The company stated that good growth in on-premise databases and data warehousing, which includes DB2, Informix and Netezza drove growth in analytics. Content and integration offerings were also up in the quarter.
Segmental revenues pertaining to Strategic Imperatives and Cloud grew 7% and 45%, respectively.
Revenues from Global Business Services (includes consulting, global process services, application management) segment were $4 billion, down 3% (down 1.9% at constant currency). Segmental revenues pertaining to Strategic Imperatives grew 13%. Cloud practice surged 57%.
Revenues from Technology Services and Cloud Platforms (includes infrastructure services, technical support services, integration software) decreased 2.5% (down 2% at constant currency) to $8.21 billion. Segmental revenues pertaining to Strategic Imperatives advanced 31%, on the back of robust performance from hybrid cloud (up 42%).
IBM now has more than 50 cloud centers globally. Both Infrastructure services and technical support services declined 2%, respectively. Integration software dipped 3% this quarter, owing to lower on-premises DevOps tools and IT services management software revenues. IBM noted that the Bluemix platform continued to expand in the reported quarter.
Systems (systems hardware and operating systems software) segment fell 16.7% on a year-over-year basis (down 12.1% at constant currency) to almost $1.40 billion. The decline primarily reflects lower z Systems and Power revenues.
IBM added seven new z systems clients in the quarter. The company anticipates launching a new mainframe late in 2017.
Power revenues declined due to IBM’s transition to a growing Linux market from declining UNIX. Workloads on Linux grew double-digit, outpacing the market in the quarter. The company noted that it has 3% market share, which presents significant growth opportunity.
Storage hardware was up 7% backed by double-digit growth in all-flash array offerings. Software defined storage revenues grew double-digit. Storage software now represents more than 40% of total storage revenue.
Global Financing (includes financing and used equipment sales) revenues slipped 1.2% (down 2.1% at constant currency) to $405 million.
Expanding Watson Offerings
IBM continues to expand Watson offerings. During the quarter, IBM entered into partnerships with the likes of Visa, Samsung, H&R Block, AT&T, Harry & David, Charlotte Russe, Performance Bicycle and others. The company added 50 new clients to Watson IoT Platform in the quarter.
The company has inked a partnership with salesforce.com, which will result in integration of Watson-Einstein. The collaboration will provide an insight on huge amount of data specifically related to the fields of health care, financial services and retail, which will boost footprint in the rapidly growing artificial intelligence (AI) market.
IBM Watson on Cloud is a key growth driver in IoT, healthcare and financial services end-markets. IBM Watson is anticipated to reach more than 1 billion people by the end of 2017. Per the IBM Investor Briefing 2017, the company estimates the market for Watson on Cloud as a decision making support system to be worth nearly $2 trillion by 2025.
During the quarter, IBM signed a collaboration agreement with China’s Wanda Internet Technology Group to provide Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS) to Chinese enterprises and businesses through a new company. Reportedly, IBM will have a share in revenues.
We also note that Blockchain initiatives, Quantum computing and Containers are some of the other catalysts that will support IBM’s growth trajectory going ahead. Notably, in Blockchain, IBM won 40 new contracts in the quarter. The company is now working on more than 400 Blockchain processes with customers like Maersk, Northern Trust and others.
IBM announced the first commercial quantum systems during the quarter. The company also launched new cognitive offerings such as Watson Imaging Clinical Review. Further, cognitive capabilities were added to applications like Watson Care Manager.
Margins
Non-GAAP gross margin contracted 300 basis points (bps) to 44.5% from the year-ago quarter. However, pre-tax margin from continuing operations expanded 410 bps on a year-over-year basis to 11.4%.
Segment wise, Cognitive Solutions, Global Business Services and Technology Services and Cloud Platforms pre-tax margin expanded 590 bps, 270 bps and 530 bps, respectively.
Systems pre-tax loss was $186 million much wider than loss of $10 million reported in the year-ago quarter.
Balance Sheet & Cash Flow Details
IBM ended first-quarter 2017 with $10.70 billion in total cash and marketable securities as compared with $8.53 billion at the end of fourth-quarter 2016. Total debt (including global financing) was $42.8 million, which increased from $42.2 billion at the end of last quarter. Core (excluding global financing) debt was $14.3 billion, flat on a sequential basis.
IBM reported cash flow from operations (excluding Global Financing receivables) of $4 billion and generated free cash flow of $1.1 billion in the quarter. The free cash flow figure was lower than free cash flow of $2.4 billion generated in the previous quarter, which included Japan tax refund. However, cash flow from operations increased slightly from $3.2 billion reported in the previous quarter.
In the reported quarter, IBM returned $2.6 billion to shareholders through dividends ($1.3 billion) and share repurchases ($1.3 billion). At the end of the quarter, the company had $3.8 billion remaining under its current buyback authorization.
Guidance
IBM reiterated forecasts for full-year 2017. Non-GAAP earnings are expected to be at least $13.80. The company continues to anticipate generating free cash flow in excess of 90% of GAAP net income.
IBM expects profitability to improve in second-half 2017 based on a number of factors. New system product launches are anticipated to boost gross profit. Further, lower spending on systems development will boost profitability.
Moreover, less dilutive effect of acquisitions, closure of pending contracts in the Global Technology Services segment, improving outlook for the Global Business Services segment and cost savings are expected to drive results in the latter half of 2017.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been seven downward revisions for the current quarter. In the past month, the consensus estimate also shifted downward by 13.6% due to these changes.
International Business Machines Corporation Price and Consensus
International Business Machines Corporation Price and Consensus | International Business Machines Corporation Quote
VGM Scores
At this time, IBM's stock has a strong Growth Score of 'A', though it is lagging a lot on the momentum front with a 'D'. However, the stock was allocated a grade of 'A' on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks' style scores indicate that the stock is suitable for value and growth investors.
Outlook
Estimates have been broadly trending downward for the stock. The magnitude of these revisions also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #4 (Sell). We are looking for a below average return from the stock in the next few months.