Earnings report: IBM shares fall despite first growth in 23 quarters

IBM saw its stock go down more than 4.5% after it reported better-than-expected earnings for the fourth quarter and full year of 2017 on Thursday.

• EPS: Excluding certain items, $5.18 in earnings per share vs. $5.17 in earnings per share as expected by analysts, according to Thomson Reuters.
• Revenue: $22.5 billion vs. $22.06 billion as expected by analysts, according to Thomson Reuters.

IBM went 22 consecutive quarters with revenue declining on a year over year basis. Now that streak has finally ended -- a positive sign as the company faces competition from faster-growing companies like Amazon, Google and Microsoft.

IBM said it took a one-time charge of $5.5 billion as a result of the recent passage of U.S. tax reform. "The charge encompasses several elements, including a tax on accumulated overseas profits and the revaluation of deferred tax assets and liabilities," the company said in the statement. Including that charge, the tax rate for the quarter was 124%, and it was 49% for all of 2017.

For the full year of 2017, IBM came up with $13.80 in earnings per share, excluding certain items, according to Thursday's statement. That's a penny short of what analysts were expecting, according to Thomson Reuters.

And IBM watchers continue to focus on the company's strategic initiatives -- analytics, cloud, mobile and security -- to deliver revenue growth. In the fourth quarter strategic initiatives delivered $11.1 billion in revenue, which represented 49 percent of all revenue. That percentage was 35% two years ago.

IBM had $17 billion in cloud revenue in 2017, up 24% year over year, with $9.3 billion of that amount delivered as a service. In 2017 IBM had $3.31 billion in capital expenditures, which was 11% year over year.

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IBM's Technology Services and Cloud Platforms revenue fell 1% with $9.2 billion in the quarter. The Cognitive Solutions business grew by 3% at $5.4 billion in revenue. The Global Business Services unit hit $4.2 billion in revenue, giving it a 1% gain.

Analysts had expected some revenue growth in Q4 to come from sales of IBM's z14 mainframe computer, which happened throughout the entirety of the fourth quarter, and indeed IBM called that out as a highlight of its Systems segment, which produced $3.3 billion in revenue, up 32% and above the FactSet estimate of $2.82 billion, according to StreetAccount.

On Thursday's conference call with analysts, IBM said it expects earnings per share of at least $13.80 in all of 2018, excluding certain items. Analysts were expecting $13.92 in earnings per share, excluding certain items, for the full year, according to Thomson Reuters. Analysts expect $2.28 in earnings per share, excluding certain items, for the first quarter, according to Thomson Reuters.

Newly appointed CFO James Kavanaugh said IBM is "allowing for some growth" in capital expenditures in 2018. The company will have an annual effective tax rate of 16 percent, plus or minus 2%, inclusive of the tax reform, Kavanaugh said. That tax rate will be up from 12% in 2017.

"For us, it's a long-term benefit, because we now have freedom of capital movement," Martin Schroeter, senior vice president of IBM Global Markets and formerly IBM's CFO, said of the tax reform.

After IBM talked about guidance and its tax rate, the stock came up in after-hours trading, hovering between 2%-3.5% below the closing price of $169.12 per share.

Heading into the earnings release, multiple analysts were curious about whether IBM would provide information about changes to its services business. "From our perspective, any signal of a more aggressive restructuring effort (at IBM's legacy software and services practices) could make us incrementally more constructive on the stock," Wedbush analysts Moshe Katri and Ariel Hughes wrote in a Thursday note. But the company didn't announce any specific adjustments.

In the fourth quarter, IBM acquired consulting agency Vivant Digital, settled a patent lawsuit with Priceline.com and said Daimler AG, JPMorgan Chase and Samsung are collaborating with the company on quantum computing technology.

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