International Business Machines (IBM - Free IBM Stock Report), a worldwide supplier of computer services, software, and systems, and a Dow 30 component, reported slightly lower than expected June-quarter results despite modest improvement in various parts of its businesses. After over four years of disappointing revenues and earnings, the stock pulled back more than 3% in Wednesday morning premarket trading.
Reported earnings of $2.48 a share fell short of our estimate of $2.55 and year-earlier results of $2.61. Retirement and acquisition costs reduced share net by $0.49 this quarter, up from $0.34 in the like period of 2016. Without these expenses, results would have been flattish.
Revenues slipped 5%, or 3% adjusted for currency changes, which presented more of a headwind than in the March quarter. The company is in the process of transitioning its businesses to what it calls strategic initiatives, that is, markets like cloud computing, analytics, mobility, and information security. Strategic initiative revenues rose 7% and accounted for about 45% of total revenues in the period. Still, growth in these newer areas is not yet offsetting declines in traditional businesses.
IBM's business segments turned in mixed performances. Cognitive Solutions (software) revenues slipped an adjusted 1.4% in the June period, hurt by weakness in transactions processing, and the segment gross margin contracted, but pretax income rose 11%. Global Business Services revenues fell 1.7%, but consulting revenues rose and signings grew. Technology Services & Cloud Platform revenues declined 3.6%, hurt by a shift away from lower-value work. Systems revenues fell 9.6%. Sales of IBMs zSystems have moderated since the product's introduction, but information storage systems grew for the second consecutive quarter. Systems margins overall were hurt by an unfavorable product mix, however, zSystems and Storage systems margins expanded. For the company as a whole, the gross margin contracted year to year, hurt by an unfavorable product mix and investment spending, but expanded on a sequential-period basis.
IBM still expects to earn $11.95 a share in 2017, after $1.85 of acquisition and retirement costs. We are lowering our revenue outlook slightly, from $78.5 billion to $78 billion, but are maintaining our 2017 share-net call of $11.95. Results in the second half should benefit from contracts signed in the June term, as well as initial sales of a new zSystem that will be available late in the September quarter. In 2018, we are cautiously optimistic that new products and productivity measures will support earnings of at least $12.00 a share even if revenues decline further.
As for the stock, the dividend yield is very attractive. However, IBM's recovery is apt to be a protracted process, so even patient investors may want to see revenues stabilize before considering making any commitments here.
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.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
