International Business Machines, (IBM – Free IBM Stock Report) a global provider of mainframe computers, as well as computer software and services, reported earnings for the December quarter and 2019 that matched expectations, on better-than-anticipated revenues. The company's declining revenues have been a concern in recent years, and the improvement cheered investors, who bid the stock up over 4% during recent trading.
IBM's December-quarter earnings of $4.71 a share matched our estimate of $4.70, but fell a bit short of results in the year-earlier period of $4.87. For all of 2019, the company reported adjusted earnings of $12.81 a share, excluding nonoperating costs of $2.24. That compares to our estimate of $12.80 and 2018 adjusted results of $13.81.
The pickup in underlying revenue growth in the December term was encouraging. Although the increase in the reported number was hardly noticeable, revenues rose 3% (adjusting for currency and divestitures). Top-line growth was powered by a 23% increase in cloud computing, helped by IBM's acquisition of software and services provider Red Hat last July. Too, systems revenues rose 16%, reflecting new mainframe computer and information storage system offerings. In contrast, the Global Business Service segment's revenues were flat, with growth in consulting offsetting declines in application management and process services. And the Global Technology Services segment's revenues slipped 4% due to lower client business volumes that hurt the more-traditional managed services.
Meanwhile, margin performance by segment was mixed. The Cloud & Cognitive Software group's margin was hurt by accounting items related to the acquisition of Red Hat. In the Global Business Services segment, investments in capacity and new offerings offset benefits from contract delivery improvement, a shift to higher value content, and a currency benefit. On the other hand, Technology Services margins improved, reflecting productivity initiatives and a better portfolio mix. And Systems margins expanded nicely, owing to the new computer hardware launches.
Note that the company's interest expense has risen sharply since IBM took on additional debt to finance the Red Hat acquisition. Since June, IBM has been chipping away at this number, which now stands at $63 billion. Excluding debt associated with IBM's financing business, core debt stands at $38 billion. The company aims to lower this number over the next couple of years.
Looking at 2020, IBM expects to earn at least $13.35 a share this year, adjusted for $2.78 of acquisition and other nonoperating costs. In the year ahead, growing contributions from Red Hat and IBM's new systems offerings ought to lift revenues modestly. At this time, we are raising our 2020 share-net call, from $13.15 to $13.35.
As for the stock, income-oriented investors may want to consider IBM shares for their well-above average dividend yield. But the issue has a bit less-than-average 3- to 5-year total return potential.
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
