International Business Machines (IBM - Free IBM Stock Report), a worldwide provider of computer systems, software and services, and a member of the Dow 30, has reported December-quarter and 2016 full-year results that slightly exceeded the company's earlier guidance. The stock was down modestly in premarket trading, but subsequently rebounded after the market opened.
In the December quarter, IBM earned $4.73 a share, excluding $0.28 of so-called nonoperating (acquisitions and retirement-related) costs. That compared favorably with our estimate of $4.57 a share and earnings of $4.59 in the final period of 2015. For all of 2016, the company earned $12.38 a share, after $1.21 of nonoperating expenses, down from the $13.60 logged in 2015, but a bit above our estimate of $12.25.
Revenues of $12.8 billion in the quarter and $79.9 billion for the year declined 1% and 2%, respectively, hurt by the strong U.S. dollar and challenges in nations like the United Kingdom, Germany, and Brazil. Those three countries accounted for nearly all of the revenue decline in the quarter.
Strategic initiative revenues (from cloud computing, analytics, mobility, cyber security) were a bright spot, increasing 11% in the December term, with cloud revenues up 33%. For the year, strategic initiatives revenues were $32.8 billion, up a currency adjusted 14% and accounting for 41% of the total. IBM appears well on its way to achieving its goal of $40 billion of strategic initiative revenues by 2018.
IBM's business groups posted mixed performances in the December period. Cognitive Solutions (software) revenues of $5.3 billion for the quarter rose 1.4%, or 2.2% adjusted for currency, aided by newer initiatives, like cloud computing, analytics, and security. But Global Business Services revenues, which includes the consulting operation, declined 4.1% or a currency adjusted 3.6%. Meanwhile, Technology Services & Cloud Platforms revenues of $9.3 billion rose 1.7% (or an adjusted 2.4%), driven by strong hybrid cloud services, analytics and security. Systems revenues of $2.5 billion declined 12.5%, but was the only group to enjoy gross margin improvement, helped by IBM's zSystem product. Financing revenues of $447 million slipped 1.5%.
Companywide, the gross margin contracted, reflecting investments in IBM's businesses and because offerings delivered as a service aren't up to scale yet. Selling, general, and administrative expenses declined 3%. Research spending rose, reflecting the strategic initiative push. Intellectual property income rose, as did the software license pipeline, which augurs well for 2017. Stock repurchases enhanced share net. IBM had $5.1 billion of remaining share-buyback authorization left at the end of 2016.
In the new year, IBM expects reported earnings of at least $11.95 a share, down from our estimate of $12.50. That figure is after $0.75 of expected acquisition costs and $1.10 of retirement-related charges. This forecast is in line with our expectation that a full turnaround in IBM's fortunes will take another year or two, although the strategic initiative businesses seem to be making headway.
From an investment perspective, the blue-chip stock's decent dividend yield may appeal to income-oriented investors. However, IBM shares, which rose significantly in the early part of last year, have very limited total return potential to 2019-2021.
About The Company: International Business Machines is a worldwide supplier of computer systems, services, and software. Revenues in 2015 can be broken down as follows: Global Technology Services, 39%; Global Business Services, 21%; Systems Hardware, 9%; Software, 28%; Global Financing, 3%. Foreign business accounted for 53% of 2015 revenues.
