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Why Is IBM (IBM) Down 9% Since Last Earnings Report?
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It has been about a month since the last earnings report for IBM (IBM - Free Report) . Shares have lost about 9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is IBM 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.
IBM's Q4 Earnings Miss Despite Higher Hybrid Cloud Adoption
International Business Machines Corporation 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.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
The consensus estimate has shifted -28.99% due to these changes.
VGM Scores
At this time, IBM has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise IBM has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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Why Is IBM (IBM) Down 9% Since Last Earnings Report?
It has been about a month since the last earnings report for IBM (IBM - Free Report) . Shares have lost about 9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is IBM 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.
IBM's Q4 Earnings Miss Despite Higher Hybrid Cloud Adoption
International Business Machines Corporation 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.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
The consensus estimate has shifted -28.99% due to these changes.
VGM Scores
At this time, IBM has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise IBM has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.