Is This a Turning Point for IBM?
After 22 consecutive quarters of year-over-year revenue declines, many investors had become disillusioned with International Business Machines (NYSE: IBM). Even famed investor Warren Buffet, whose favorite holding period is forever, sold 30% of Berkshire Hathaway's (NYSE: BRK-B) (NYSE: BRK-A) holdings in IBM. "I don't value IBM the same way that I did six years ago, when I started buying," Buffett told CNBC at the time.
Going into its fourth-quarter and full-year 2017 earnings report, investors were hoping for the long-awaited end to its revenue growth slump -- and on that account, they were not disappointed.
Are IBM's strategic imperatives driving its return to revenue growth? Image source: Getty Images.
Finally!
Metric | Q4 2017 | Q4 2016 | Year-Over-Year Change |
|---|---|---|---|
Revenue | $22.54 billion | $21.77 billion | 3.55% |
GAAP net income (loss) | (1.05 billion) | $4.50 billion | N/A |
GAAP earnings (loss) per diluted share | ($1.14) | $4.72 | N/A |
Data source: IBM. Chart by author.
For the just-completed quarter, IBM produced revenue of $22.5 billion, an increase of 3.5% year over year, marking the first gain in nearly six years. Operating income grew 3% over the prior-year quarter, producing earnings per share of $5.18, excluding one-time items, though the company incurred a massive tax-related charge that resulted in a GAAP loss per diluted share of $1.14. These results beat analysts' consensus estimates for revenue of $22.06 billion and non-GAAP earnings of $5.17, respectively.
Recently enacted U.S. tax legislation resulted in a one-time charge of $5.5 billion. Many companies, IBM included, carry deferred tax assets on their balance sheets, which allow them to deduct losses against future income. With the recently passed tax law resulting in lower corporate tax rates, those deferred tax assets are now worth significantly less, resulting in the one-time charge.
Strategic imperatives
IBM has been investing heavily and shifting its resources into several high-growth initiatives, which it has dubbed strategic imperatives. This consists of areas like analytics, cloud computing, artificial intelligence (AI), security, and mobile. Revenue from those activities achieved quarterly sales of $11.1 billion, up 17% year over year, and now account for 46% of IBM's total revenue.
IBM reported cloud-computing revenue that increased to $5.5 billion, up 30% year over year, and growing to $17 billion for the full year, an increase of 24%. Analytics revenue grew 9%, mobile sales jumped 23%, and security revenue soared 132%, all over the prior-year quarter.
IBM pointed out that the 10 largest global banks, nine of the top 10 retailers, and eight of the top 10 airlines are customers of IBM Cloud. The company also announced that it led the U.S. in patents during 2017, "marking our twenty-fifth consecutive year at number one." Nearly half of those patents, which exceeded 9,000 in all, were in the fields of AI, cloud computing, cybersecurity, blockchain, and quantum computing.
IBM CEO Ginni Rometty chimed in on the results, saying:
Our strategic imperatives revenue again grew at a double-digit rate and now represents 46 percent of our total revenue, and we are pleased with our overall revenue growth in the quarter. During 2017, we strengthened our position as the leading enterprise cloud provider and established IBM as the blockchain leader for business. Looking ahead, we are uniquely positioned to help clients use data and AI to build smarter businesses.
Going forward
In an unusual move, IBM didn't provide the forward-looking expectations for the coming year that it typically provides in its earnings press release. During the conference call, CFO James Kavanaugh said the company planned to produce revenue growth and operating earnings per share of at least $13.80 in 2018. He went on to say that for the first quarter, IBM expected between 17% and 18% of the total, producing operating earnings per share in a range between $2.35 and $2.48. He also stated that IBM expects free cash flow of about $12 billion.
IBM has been in the midst of a multiyear transition away from some of its legacy products and services to focus more on its strategic imperatives. The company has broken its 22-quarter losing streak and showed that it's pointed in the right direction. IBM may still face challenges going forward, but it may finally have momentum in its favor.
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Danny Vena has the following options: long January 2019 $165 calls on IBM. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
