IBM beats earnings estimates but shares fall on continued sales decline

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IBM Corp.’s shares fell 2.4 percent in late trading Thursday despite the tech giant reporting better-than-expected fourth-quarter results and raising its forecast for the new fiscal year.

The company reported a profit before certain costs of $5.01 per share, beating analyst expectations of $4.88. Revenues of $21.8 billion beat expectations of $21.64 billion but still represented a more than 1 percent drop in year-on-year revenue — the 19th straight quarter of declining revenues for Big Blue.

IBM’s shares got a slight bump before the release of the results Thursday, but they dropped in after-hours trading on investors’ concerns that the company’s results were inflated by onetime items. IBM Chief Financial Officer Martin Schroeter admitted during the earnings call that the company would be facing a headwind in 2017, partly from less favorable currency exchange conditions.

Onetime factors also provided a fourth-quarter upside unlikely to be repeated going forward. One was a tax case won by IBM in Japan. “Obviously we’re not going to win another tax case in Japan this year,” Schroeter said on the call.

IBM also got a onetime bump in revenues from intellectual property licensing, without which analysts said IBM would have missed forecasts. Schroeter said IBM was committed to making IP sales a steadier business, but analysts have been skeptical about their long-term value.

Barclays Capital Inc. analyst Mark Moskowitz said in a note to clients after the report that there could be “near-term tumult” in IBM’s stock price. “Our take is that quality of earnings needs to improve before grabbing incremental investor sponsorship, particularly as relates to margin stability and transparency related to IP revenue, not to mention Watson,” he wrote.

Strategic imperatives

Despite the continued lack of revenue growth, Schroeter noted some positives. He highlighted the success of IBM’s “strategic imperatives” over the last year, which accounted for 40 percent of the company’s total revenues for 2016. This is the business segment that includes IBM’s cloud and analytics solutions, as well as the cognitive solutions that are powered by its Watson artificial intelligence-powered system (pictured). Revenues from those businesses rose 13 percent, to $32.8 billion.

Cloud computing revenues showed particular strength, rising 35 percent, to $13.7 billion. “Cloud was the highlight of the quarter,” Morgan Stanley analyst Katy Huberty said in a note to clients. She added that signs of operating leverage in cloud and cognitive segments indicate that pre-tax income could improve more next year.

During the earnings call, Schroeter particularly highlighted the success of Watson, which he described as the “silver thread” that runs through many of IBM’s services.

“It runs through the platform, it runs through Watson Health, it runs through Watson IoT, it’s in security now,” Schroeter said. “Watson is firmly, firmly established as the silver thread that runs through those cognitive solutions, and you can see all of that through the solution software performance.”

IBM’s cognitive solutions revenues saw growth of 5 percent from a year ago.

Schroeter also pointed to IBM’s continued investment in other strategic areas, including IBM Blockchain, and he listed off a number of major acquisitions the company made over the last year, three of which occurred during the fourth quarter.

The struggle to keep up

As a company founded more than 105 years ago, IBM has seen its share of paradigm shifts that have redefined entire industries, and its current focus on AI and its other strategic imperatives demonstrates that the company is still trying to keep up with the times.

Patrick Moorhead, president of Moor Insights & Strategy, says IBM’s progress is promising, but its lack of growth is still a problem.

“IBM appears to be making strides in their strategic imperatives as they get closer to the 50-50 crossover point, but the lack of revenue growth is disappointing,” Moorhead told SiliconANGLE. “Like many enterprise-focused companies, IBM is having challenges replacing traditional IT revenue with forward-looking revenue.”

Despite IBM’s growth problems, Moorhead noted that the company still excels at offering value in key areas, such as with its efforts on PowerAI and OpenPOWER. “It truly adds industry value and is differentiated. IBM has AI covered from enterprise to even DIY shops.”

Moorhead also added that IBM’s cloud business is showing progress. “Companies like Microsoft are driving revenue at a faster pace, but still impressive for IBM,” he said.

Image courtesy of IBM