International Business Machines (IBM – Free IBM Stock Report), a worldwide supplier of technology and business services, software, and computer hardware, and a component of the Dow 30, turned in another quarter of lower earnings in the September term despite progress in selected areas. Even so, investors apparently were hopeful that the company's fortunes are starting to turn around, and bid the stock up sharply in early Wednesday morning trading.
September-period earnings of $2.92 a share about matched our estimate of $2.90 but slipped 2% from the $2.98 logged in the year-earlier period. Reported share net include $0.38 of retirement and acquisition costs.
Revenues slipped 1% adjusted for currency, but were better than our expectation of a 3%-4% decline. Across IBM's business lines, revenues from strategic imperatives (like analytics and cloud computing) rose 10%. By business segment, a 3% increase in Cognitive Solutions (software) and a 10% rise in Systems were offset by a 2% decline in Global Business Services and a 4% decline in Technology Services. Within Cognitive Solutions, annuity-type revenues increased. The rebound in Systems revenues reflected the launch of IBM's new z14 system with advanced encryption capabilities and growth in information storage systems. But Business Services revenues fell despite renewed growth in the consulting business. And Technology Services was hurt by the company's ongoing shift away from lower-value work.
Meanwhile, gross margins narrowed both year to year and sequentially in all but the Systems segment, but the consolidated sequential-period decline was smaller. IBM's operating margin also narrowed 1%, partly due to $100 million of expense tied to commercial disputes and a $220 million decline in intellectual property income.
Looking ahead, we expect IBM to earn $11.95 a share in 2017, including $1.85 of retirement and other one-time costs. In 2018, we figure the company will make incremental progress, with earnings of $12.10 a share on flat revenues.
As for the stock, the issue still has below-average total return possibilities to 2020-2022 and less potential than before the September-period earnings announcement. IBM's comeback will take time and long-term investors may want to wait for a better entry point. But the stock's decent dividend yield may interest income-oriented investors.
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.
— Theresa Brophy
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
