Investors looking for signs that International Business Machines (IBM – Free IBM Stock Report) was moving in the right direction may not have derived much encouragement from the company's March-quarter results. The provider of enterprise computing software, services, and hardware, made modest revenue progress in the opening quarter of 2018, but earnings slipped slightly. The stock plunged about 7% in value after the release.
The company reported earnings of $1.81 a share for the March quarter, about in line with our estimate of $1.80 and down 2% from results of $1.85 in the year-earlier period. Consolidated results included a $100 million charge, included in tax expense, related to the new tax law. Reported revenues rose 5%, marking the second period in a row of year-to-year quarterly revenue growth in a number of years. Adjusted for currency, however, revenues were flat.
On an adjusted basis, IBM's Cognitive Solutions (software) revenues increased 2%, led by analytics and security products. The segment's pretax profits grew 5% and the margin was flat despite workforce reductions, which had a two-percentage point negative margin impact, and continued investment in the business.
The company's Systems segment also performed well. Adjusted revenues rose 4%, driven by strong demand for its new z14 systems (revenue up 54%) and Power systems, offset partly by a decline in information storage systems. Excluding an unusual charge, systems pretax margins widened slightly, supported by growth in more profitable products and cost-reduction initiatives.
IBM's two services segments didn't perform as well. Global Business Services and Technology Services & Cloud Platforms, each reported 1% adjusted top-line declines. Within these two segments, however, revenues from strategic markets, like hybrid cloud services and analytics, advanced strongly, though not enough to offset decreases in more traditional offerings. But workforce rebalancing actions reduced margins in both segments.
Looking ahead, IBM faces continued intense competition in businesses like software, and we think it will take time to replace declining revenues in legacy businesses with strategic markets products. The company forecasts reported earnings in 2018 of $11.58 a share, including $2.22 of charges related to retirement, acquisitions, and intangible assets. We have lowered our share-net estimate for the year, from $11.75 a share to $11.50, and our 2019 estimate, from $12.25 a share to $11.90.
After the stock's pullback, IBM shares have slightly less-than-average total return potential to the 2021-2023 time frame, bolstered by an attractive dividend yield. Although the yield is tempting, a full turnaround in the company's fortunes will take some time. All but the most patient of investors may want to defer commitments.
About The Company:International Business Machines is a worldwide supplier of computer systems, services, and software. Revenues in 2017 can be broken down as follows: Cognitive Solutions, 23%; Global Business Services, 21%; Technology Services & Cloud Platforms, 43%; Systems, 10%; Global Financing, 2%; and Other, 1%.
— Theresa Brophy
