International Business Machines (IBM – Free IBM Stock Report), the technology behemoth and Dow-30 component, has released December-period financial results. For the quarter, revenues came in at $21.8 billion, in line with our estimate, and 3% below the year-earlier tally. The top-line performance was no surprise, as IBM continued to be hampered by unfavorable currency exchange rates. The earnings result was better, with the bottom line reaching $4.87 a share. This was nicely ahead of our estimate and Wall Street's consensus expectation, and represented an $0.08 advance over last year. The figure also excluded a $2.72-a-share charge related to the U.S. Tax Cuts and Jobs Act of 2017. Profits were helped by modestly higher margins, lower taxes, and a reduction in the share count. Investors' initial reaction to the report was quite positive.
Looking at the quarter in more detail, the company continued to make strides in regard to its restructuring of operations. Over the past several months, management has been improving efficiency, introducing more automation, and changing the ways its employees work. This has helped reduce operating expenses. By segment, Cognitive Solutions (solutions and transaction processing software) delivered revenues of $5.5 billion, which was flat, year over year. Global Business Services (consulting, application management, and global process services) achieved a 4% revenue increase, to $4.3 billion. Strong demand for its offerings, as well as wider margins, were the highlights here. Technology Services & Cloud Platforms (infrastructure services and technical support) suffered a 3% revenue decline, to $8.9 billion, which mostly stemmed from currency headwinds. The Systems division (hardware and operating system software) struggled, and revenues declined 21%, to $2.6 billion. All in all, it was a decent, though unexciting, quarter for IBM, but still enough to give investors confidence.
For full-year 2018, the company tallied revenues and earnings of $79.6 billion and $12.23 a share, respectively. Both figures were just modestly better than 2017's results.
Looking ahead, our outlook for IBM is mostly positive, though it hinges on the company completing the acquisition of Red Hat (RHT). It has offered $190 a share for the provider of open-source software for cloud computing, in a deal valued at $34 billion. Directors of both companies have approved the pact, though it still requires other sign offs before it can be consummated. IBM is banking on Red Hat helping it materially expand its capabilities helping businesses transition to cloud operations. This should also open up cross-selling opportunities. Red Hat's extensive developer ecosystem is another plus, and IBM estimates that the combination will add 200 basis points to its five-year compound annual revenue growth rate. This transaction is expected to close in the second half of 2019, and we think it will add nicely to IBM's bottom line. However, it will certainly take time to integrate these two large businesses.
Per Value Line convention, we will not include potential Red Hat contributions into our financial presentation until the deal is completed. As such, without Red Hat, we expect more of the same from IBM, including continued unfavorable exchange rates and unexciting top- and bottom-line performances over the next couple of quarters.
As for the stock, it does hold some appeal. Without Red Hat, the equity offers a well-covered dividend with a yield of roughly 5%. Three- to five-year appreciation potential is decent, but below average. If the Red Hat acquisition is completed and the integration process goes smoothly, however, then we think that IBM may well deliver market-beating results out to the 2021-2023 time frame.
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%.
- Ian Gendler
