International Business Machines, (IBM –Free IBM Stock Report) a global provider of computer software, services, and systems, and a component of the Dow 30, reported June-quarter earnings that topped expectations. Investors bid the stock up about 3% in early Thursday morning trading.
The company earned $2.61 a share in the June period, up 5% compared to the $2.48 logged in the year-earlier quarter and our estimate of $2.35. Reported earnings include $0.47 a share of acquisition and retirement costs. Pretax earnings told an even better story, rising 14%. But a higher tax rate, absent the tax benefits recorded in the 2017 June term, limited the bottom-line improvement.
Revenues rose 4%, or 2% adjusted for currency, powered mainly by a 23% increase by IBM's Systems segment, including a more than doubling of its sales of new z systems. Revenues related to strategic initiatives like cloud computing and analytics, advanced 12%, and now account for 48% of total revenues. The services revenue trajectory also improved, which is important since these segments generate about 60% of IBM top line annually. But software revenues were hurt by a decline in storage software.
Meanwhile, IBM's gross margin contracted about 60 basis points, reflecting a less favorable revenue mix and investments in cloud computing. On a positive note, however, selling and administrative expenses declined about 4%, helping to support the healthy pretax earnings advance. The company has been realizing acquisition synergies and has been working to align the skills of its workforce to high-value markets and shift the expense mix to more variable (rather than fixed) costs. The higher tax rate posed a significant headwind, but stock repurchases enhanced earnings per share.
Looking ahead, despite the June-quarter earnings improvement, management is maintaining its full-year reported earnings expectation of $11.60 a share, which includes $2.20 of charges related to acquisitions, retirement costs, and the impact of tax reform in the United States. The full-year forecast suggests that comparisons in the next two quarters will be unfavorable. Indeed, the company expects currency to have a negative effect on revenues in the second half and possibly boost product costs. Too, systems revenues may not stay as strong, since sales of new systems tend to moderate after an initial strong market reception. But management expects its productivity initiatives to ramp up. With the near-term earnings outlook uncertain, we are maintaining our 2018 and 2019 share-net estimates of $11.60 and $11.85, respectively.
In all, although IBM appears to be making some progress, we still expect the company's recovery to proceed at an uneven pace and a full turnaround to be a protracted process. Only very patient investors should consider IBM shares. But the above-average dividend should make the waiting easier.
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
