IBM Corp. got a boost from investors today after posting fourth-quarter results and 2019 guidance that beat analysts’ expectations and helped gloss over a second successive decline in its quarterly revenue.
The information technology giant reported earnings before certain costs such as stock compensation of $4.87 per share on revenue of $21.8 billion. That’s down 3 percent from the same period a year ago, though Chief Financial Officer James Kavanaugh attributed much of that decline to currency shifts as well as comparisons with an especially strong quarter a year ago for IBM’s mainframe computers.
Still, the results beat the $4.84 earnings per share on revenue of $21.75 billion that Wall Street had forecast.
The company also beat expectations for its full year, with total earnings per share in 2018 hitting $13.81 on revenue of $79.6 billion. That was up 1 percent over the previous year. Analysts had earlier pegged IBM’s total earnings for the year at $13.78 per share.
Shareholders responded with enthusiasm, bidding up the company’s stock by more than 7 percent in after-hours trading. Update: On Wednesday, shares were rising 8.5 percent.
“IBM still managed to beat, thanks in a large part to the old reliable services business and managing Wall Street expectations,” said Dave Vellante, co-founder and chief analyst at SiliconANGLE sister market research firm Wikibon. “They also returned 85 percent of their free cash flow to investors in the form of dividends and stock buybacks. That always helps.”
IBM Chief Executive Officer Ginni Rometty (pictured) said in a statement that the return to full-year revenue growth reflected “growing demand for our services and leadership solutions in hybrid cloud, AI, analytics and security.”
Company officials highlighted further positive aspects of its performance this year, noting that $39.8 billion of its revenue, which is almost half of its total, came from areas it terms “strategic imperatives” that include analytics, cloud, mobile and social.
That number is impressive, but some analysts raised concerns about IBM’s cloud growth in particular. Cloud revenue totaled $19.2 billion for the year, up 12 percent compared to 2017. However, this was barely half the growth rate of the previous year and far less than market leaders Amazon Web Services Inc., Microsoft Corp. and Google LLC.
Though Kavanaugh talked up cloud results on the earnings conference call, executives may be somewhat disappointed by the prospect of stalling growth in the cloud. The company has been pushing that business hard as it seeks to derive the bulk of its revenue from new services such as artificial intelligence and security software, instead of its traditional consulting and hardware sales.
Still, on Wednesday IBM announced the latest in a series of hybrid-cloud deals. Under a multiyear services agreement valued at $260 million, IBM will provide IT infrastructure services to Manila-based Bank of the Philippine Islands.
“IBM is going after high-value opportunities, which means they’re not going to go head-to-head with AWS in cloud, rather they’re going to try to move the complex high-value workloads toward a cloud model,” Vellante said. “That means lots of hybrid/on premises, lots of application modernization, lots of services and some drag-along hardware.”
That strategy goes a long way toward explaining why IBM decided to acquire open-source software company Red Hat Inc. in a blockbuster $33 billion deal it announced last October. At the time of that announcement, Rometty said the deal would be a “game changer” for IBM once it’s completed later this year.
“The Red Hat deal should add black ink to the IBM Cloud business,” said Charles King, principal analyst at Pund-IT Inc. “Red Hate Enterprise Linux plays a central role in many large companies’ hybrid and multicloud efforts, and the company’s services offerings and organization should align nicely with IBM’s. Some may say that IBM paid a premium for Red Hat, but to my mind it’s an investment that should pay off handsomely for years.”
IBM will certainly be hoping that investment does pay off, or else it risks falling back into the trap of consecutive quarterly revenue declines. The company had seen its revenue decline each quarter for six years until it finally reversed that trend in January 2018. But after posting two straight quarters of growth, it has now followed up with two more quarters in which its revenue has fallen.
Still, IBM for the moment is optimistic that this is just a temporary blip. First-quarter guidance wasn’t forthcoming at this time, but the company said it’s targeting full-year earnings per share of $13.90 in 2019, which doesn’t include the impact of the Red Hat acquisition expected to close midyear. The forecast sits just above the current analyst forecast of $13.79 in earnings per share.
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