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IBM's Q4 Earnings Miss Despite Higher Hybrid Cloud Adoption
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International Business Machines Corporation (IBM - Free Report) reported relatively healthy fourth-quarter 2021 results with solid hybrid cloud adoption backed by a resilient business model and robust cash flow position driven by a diligent execution of operational plans. Despite year-over-year growth, both adjusted earnings and revenues missed the Zacks Consensus Estimate. The company expects to continue investing in key areas and adjust its business according to the evolving market scenario to fuel long-term growth while maintaining a healthy dividend payment and actively pruning debt.
Net Income
On a GAAP basis, IBM reported net income of $2,332 million or $2.57 per share compared with $1,356 million or $1.51 per share in the year-ago quarter. The year-over-year improvement was primarily attributable to higher revenues and lower operating expenses during the quarter. In full-year 2021, IBM recorded net income of $5,743 million or $6.35 per share compared with $5,590 million or $6.23 per share in 2020, owing to top-line growth and lower expenses.
Excluding non-recurring items, adjusted earnings in the reported quarter were $3.35 per share, representing year-over-year growth of 78%. Adjusted earnings in the fourth quarter, however, missed the Zacks Consensus Estimate by 4 cents.
Quarter Details
Quarterly GAAP operating revenues increased 6.5% year over year to $16,695 million, largely due to higher revenues from consulting and software businesses. The top line, however, missed the consensus mark of $17,568 million. In full-year 2021, GAAP operating revenues were up 3.9% year over year to $57,350 million.
Gross profit in the quarter was $9,500 million compared with $9,238 million in the prior-year quarter owing to top-line growth, resulting in respective gross margins of 56.9% and 58.9%. Total expenses declined to $6,632 million from $8,224 million.
Segmental Performance
IBM has restructured its segments post the separation of Kyndryl. The new segments of the company are Software, Consulting, Infrastructure and Financing.
Software (erstwhile Cloud & Cognitive Software): This segment consists of Hybrid Platform & Solutions comprising software services, Red Hat, automation and data & AI businesses and Transaction Processing. Total segment revenues improved to $7,273 million from $6,719 million with strength across hybrid cloud (up 7%), AI (1%), Red Hat (19%) and automation (13%) businesses. Transaction Processing revenues were up 11%, largely due to the new commercial external sales to Kyndryl. Segment pre-tax income was $2,109 million compared with $1,151 million in the year-ago quarter for respective margins of 29% and 17.1%.
Consulting (erstwhile Global Business Services): This segment comprises Business Transformation, Technology Consulting and Application Operations. Total segment revenues were $4,746 million, up from $4,196 million with solid revenues from Business Transformation (up 18%), Technology Consulting (14%) and Application Operations (6%). Segment pre-tax income was $436 million compared with $62 million in the year-ago quarter for respective margins of 9.2% and 1.5%.
Infrastructure (erstwhile Systems): This segment comprises Hybrid Infrastructure and Infrastructure Support services. Total revenues were $4,414 million, marginally down from $4,425 million, due to flat Hybrid Infrastructure revenues and lower Infrastructure Support revenues. Segment pre-tax income was $1,036 million compared with $629 million in the year-ago quarter for respective margins of 23.5% and 14.2%.
Financing (erstwhile Global Financing): This segment includes client and commercial financing services. Total revenues were $172 million, down from $244 million, due to the challenging macroeconomic environment. Segment pre-tax income was $79 million compared with $110 million in the year-ago quarter for respective margins of 46% and 45.1%.
Cash Flow & Liquidity
IBM generated $12.8 billion of cash from operations in 2021 compared with $18.2 billion in 2020. Free cash flow at year-end 2021 was $6.5 billion compared with $10.8 billion a year ago. As of Dec 31, 2021, IBM had $7.6 billion of cash and marketable securities with long-term debt of $51.7 billion compared with respective tallies of $14.3 billion and $61.5 billion in the prior-year period.
Moving Forward
For full-year 2022, management expects mid-single revenue growth with free cash flow in the range of $10-10.5 billion. The company has acquired 15 firms in 2021 to augment its hybrid and AI capabilities and has reorganized its businesses according to the evolving market conditions. IBM expects strong growth momentum in its Software and Consulting businesses with healthy pre-tax operating margin.
Zacks Rank & Stocks to Consider
IBM currently has a Zacks Rank #3 (Hold).
Hewlett Packard Enterprise Company (HPE - Free Report) sports a Zacks Rank #1 (Strong Buy). It has a long-term earnings growth expectation of 5.8% and delivered an earnings surprise of 14.4%, on average, in the trailing four quarters. Over the past year, Hewlett Packard has gained a modest 31.7%.
Earnings estimates for the current year for the stock have moved up 12.8% over the past year, while that for the next fiscal is up 26.4%. Hewlett Packard has been pursuing acquisitions to focus more on high-margin hybrid IT models that leverage on-premises and cloud-computing power. It views AI, Industrial IoT and distributed computing as the next major markets.
SeaChange delivered an earnings surprise of 37.2%, on average, in the trailing four quarters and has a long-term growth expectation of 10%. Earnings estimates for the current year for the stock have moved up 35.7% since January 2021. Over the past six months, SeaChange has gained a modest 9.3%.
Vocera Communications, Inc. sports a Zacks Rank #1. It has a long-term earnings growth expectation of 18% and delivered a stellar earnings surprise of 109.6%, on average, in the trailing four quarters.
Over the past year, Vocera has gained 76.3%. It offers an all-inclusive digital platform for hands-free communication via secure text messaging, alert and alarm management. Leveraging a patent-protected, enterprise-class server software, Vocera provides an advanced clinical rules engine that simultaneously unifies data from multiple sources, prioritizes notifications and sends messages to the right care team members. This, in turn, augments clinical workflow by enabling the interoperability of the solution with a significant number of clinical and operational systems used in hospitals today.
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IBM's Q4 Earnings Miss Despite Higher Hybrid Cloud Adoption
International Business Machines Corporation (IBM - Free Report) reported relatively healthy fourth-quarter 2021 results with solid hybrid cloud adoption backed by a resilient business model and robust cash flow position driven by a diligent execution of operational plans. Despite year-over-year growth, both adjusted earnings and revenues missed the Zacks Consensus Estimate. The company expects to continue investing in key areas and adjust its business according to the evolving market scenario to fuel long-term growth while maintaining a healthy dividend payment and actively pruning debt.
Net Income
On a GAAP basis, IBM reported net income of $2,332 million or $2.57 per share compared with $1,356 million or $1.51 per share in the year-ago quarter. The year-over-year improvement was primarily attributable to higher revenues and lower operating expenses during the quarter. In full-year 2021, IBM recorded net income of $5,743 million or $6.35 per share compared with $5,590 million or $6.23 per share in 2020, owing to top-line growth and lower expenses.
Excluding non-recurring items, adjusted earnings in the reported quarter were $3.35 per share, representing year-over-year growth of 78%. Adjusted earnings in the fourth quarter, however, missed the Zacks Consensus Estimate by 4 cents.
Quarter Details
Quarterly GAAP operating revenues increased 6.5% year over year to $16,695 million, largely due to higher revenues from consulting and software businesses. The top line, however, missed the consensus mark of $17,568 million. In full-year 2021, GAAP operating revenues were up 3.9% year over year to $57,350 million.
Gross profit in the quarter was $9,500 million compared with $9,238 million in the prior-year quarter owing to top-line growth, resulting in respective gross margins of 56.9% and 58.9%. Total expenses declined to $6,632 million from $8,224 million.
Segmental Performance
IBM has restructured its segments post the separation of Kyndryl. The new segments of the company are Software, Consulting, Infrastructure and Financing.
Software (erstwhile Cloud & Cognitive Software): This segment consists of Hybrid Platform & Solutions comprising software services, Red Hat, automation and data & AI businesses and Transaction Processing. Total segment revenues improved to $7,273 million from $6,719 million with strength across hybrid cloud (up 7%), AI (1%), Red Hat (19%) and automation (13%) businesses. Transaction Processing revenues were up 11%, largely due to the new commercial external sales to Kyndryl. Segment pre-tax income was $2,109 million compared with $1,151 million in the year-ago quarter for respective margins of 29% and 17.1%.
Consulting (erstwhile Global Business Services): This segment comprises Business Transformation, Technology Consulting and Application Operations. Total segment revenues were $4,746 million, up from $4,196 million with solid revenues from Business Transformation (up 18%), Technology Consulting (14%) and Application Operations (6%). Segment pre-tax income was $436 million compared with $62 million in the year-ago quarter for respective margins of 9.2% and 1.5%.
Infrastructure (erstwhile Systems): This segment comprises Hybrid Infrastructure and Infrastructure Support services. Total revenues were $4,414 million, marginally down from $4,425 million, due to flat Hybrid Infrastructure revenues and lower Infrastructure Support revenues. Segment pre-tax income was $1,036 million compared with $629 million in the year-ago quarter for respective margins of 23.5% and 14.2%.
Financing (erstwhile Global Financing): This segment includes client and commercial financing services. Total revenues were $172 million, down from $244 million, due to the challenging macroeconomic environment. Segment pre-tax income was $79 million compared with $110 million in the year-ago quarter for respective margins of 46% and 45.1%.
Cash Flow & Liquidity
IBM generated $12.8 billion of cash from operations in 2021 compared with $18.2 billion in 2020. Free cash flow at year-end 2021 was $6.5 billion compared with $10.8 billion a year ago. As of Dec 31, 2021, IBM had $7.6 billion of cash and marketable securities with long-term debt of $51.7 billion compared with respective tallies of $14.3 billion and $61.5 billion in the prior-year period.
Moving Forward
For full-year 2022, management expects mid-single revenue growth with free cash flow in the range of $10-10.5 billion. The company has acquired 15 firms in 2021 to augment its hybrid and AI capabilities and has reorganized its businesses according to the evolving market conditions. IBM expects strong growth momentum in its Software and Consulting businesses with healthy pre-tax operating margin.
Zacks Rank & Stocks to Consider
IBM currently has a Zacks Rank #3 (Hold).
Hewlett Packard Enterprise Company (HPE - Free Report) sports a Zacks Rank #1 (Strong Buy). It has a long-term earnings growth expectation of 5.8% and delivered an earnings surprise of 14.4%, on average, in the trailing four quarters. Over the past year, Hewlett Packard has gained a modest 31.7%.
Earnings estimates for the current year for the stock have moved up 12.8% over the past year, while that for the next fiscal is up 26.4%. Hewlett Packard has been pursuing acquisitions to focus more on high-margin hybrid IT models that leverage on-premises and cloud-computing power. It views AI, Industrial IoT and distributed computing as the next major markets.
SeaChange International, Inc. (SEAC - Free Report) , carrying a Zacks Rank #2 (Buy), is another solid pick for investors. You can see the complete list of today’s Zacks #1 Rank stocks here.
SeaChange delivered an earnings surprise of 37.2%, on average, in the trailing four quarters and has a long-term growth expectation of 10%. Earnings estimates for the current year for the stock have moved up 35.7% since January 2021. Over the past six months, SeaChange has gained a modest 9.3%.
Vocera Communications, Inc. sports a Zacks Rank #1. It has a long-term earnings growth expectation of 18% and delivered a stellar earnings surprise of 109.6%, on average, in the trailing four quarters.
Over the past year, Vocera has gained 76.3%. It offers an all-inclusive digital platform for hands-free communication via secure text messaging, alert and alarm management. Leveraging a patent-protected, enterprise-class server software, Vocera provides an advanced clinical rules engine that simultaneously unifies data from multiple sources, prioritizes notifications and sends messages to the right care team members. This, in turn, augments clinical workflow by enabling the interoperability of the solution with a significant number of clinical and operational systems used in hospitals today.