International Business Machines, (IBM – Free IBM Stock Report) a global provider of computer hardware, software, and services to companies and institutions, as well as a Dow-30 component, has released its earnings for the March quarter. Adjusted earnings of $2.25 a share met expectations, but revenues declined 4.7% year over year, or 0.9% adjusted for currency. The stock fell as much as 6% in Wednesday mid-morning trading as investors apparently were disappointed by the company's limited progress in accelerating sales of cloud computing offerings.
Examining IBM's performance by business segment, Cloud & Cognitive Software revenues rose 2% adjusted for currency, due to good growth in information security offerings and in solution products, such as Watson Health. The segment's pretax margin expanded two percentage points, reflecting a decline in workforce rebalancing costs. Global Business Services also staged a favorable performance, with currency-adjusted revenues up 4%, supported by a 9% increase in consulting. The division's margin also improved, driven by a mix shift to higher-value offerings, productivity initiatives, and some help from currency, which generally helps to reduce expense when it hurts the top line.
IBM's other two business groups did not do as well in the March quarter. Global Technology Services revenues slipped 3%, but the segment's margin expanded 110 basis points, reflecting efforts to reduce low-value services content and increase efficiency. Meanwhile, Systems revenues fell 9% and margins contracted a percentage point. Sales of IBM's z systems have declined sharply following an initial surge just after the product was introduced in late 2017. Too, information storage systems faced a competitive market climate. Finally, the Global Financing segment (financing customer purchases and used equipment) turned in a flat performance.
Meanwhile, the company still expects to generate $12 billion of free cash flow in 2019. Management plans to suspend share repurchases in 2020 and 2021, as IBM pays down debt for its acquisition of Red Hat, a leading provider of open-source cloud computing software. The deal is anticipated to close in the second half of 2019 (and is not yet factored into our estimates). About 60% of IBM's debt currently supports its finance business.
For the year ahead, we are maintaining our share-net estimate of $13.90, which excludes $1.45 of so-called nonoperating expenses, including costs associated with the pending Red Hat acquisition. And we continue to look for earnings of $14.15 a share in 2020.
Over the long haul, IBM's challenge is to offset declining revenues from older offerings with growth in cloud computing-based software and services. It is making gradual progress, and the addition of Red Hat should accelerate the growth of IBM's cloud computing business, but that market is highly competitive. Still, the stock offers a dividend yield that is about twice the Value Line median, and very patient investors may want to consider IBM shares for their worthwhile total return potential to 2022-2024.
About The Company: International Business Machines Corporation is a worldwide supplier of technology and business services, software, and systems hardware. Revenues in 2018 can be broken down as follows: Technology Services & Cloud Platforms, 43%; Cognitive Solutions, 23%; Global Business Services, 21%; Systems, 10%; Financing & Other, 3%.
- Theresa Brophy
