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Summary

  • IDC projects that cloud computing would reach a value of $107 billion by 2017; the market would underscore about 23.5% annual growth rate over the foreseeable future.
  • IBM is on an acquisition spree and acquired SoftLayer Technologies Inc. and Cloudant Inc. to establish a foothold in the cloud computing market.
  • The company sold its customer care unit to Synnex Corp. in exchange for $505 million.
  • There is further discussion going on regarding IBM’s server business sale to China’s Lenovo Group Ltd.

International Business Machines Corp. (NYSE:IBM) reported dismal earnings as the first three months of fiscal year 2014 came to an end. The company reported declining or flattish revenues across all of its reportable segments. The geographical performance of the company has remained rather disappointing as well. Disheartened, many investors sold off their holdings, leading to a 4.2% decline in the stock price in late hours trading.

Reported Earnings versus Estimates

The systems and technology segment that contributes 11% to the top line of the company has been showing a declining performance per quarter for more than two years. The segment's revenues indicated a fall of 23% over the recently ended quarter. While the performance fell or remained flat across all reportable segments, the drop remained confined to low single digits in other segments. Aggregate revenue for the quarter dropped approximately 2% YoY to $22.48 billion, marking the eighth consecutive slip and fell short of analysts' estimates of $22.9 billion.

With regards to bottom line performance, IBM's earnings stalled at $2.38 billion from $3 billion a year ago. Per share earnings of the company showed a 15% drop to $2.29 per share from $2.7 per share in the same period last year, reflecting the drop in the operating earnings of the company. IBM has been making aggressive attempts at bringing down its operating costs, which led to an $870 million charge related to downsizing and severely impacted the bottom line. The earnings met Wall Street estimates.

Geographically, the emerging markets have shown disappointing performance as well with a 12% YoY decline in Asia Pacific recorded in the first quarter of fiscal year 2014. China is largely responsible for the fall in revenue from the region with the country's revenue marking a 20% decline.

Re-Strategizing

Even though the recent quarter's performance has remained dismal, IBM's revenue is on course to turn around in the future. The company is shifting its focus from less profitable or unprofitable businesses and developing a new scope. Under that vision the company is investing billions of dollars in cloud computing wherein people may opt to rent hardware as opposed to purchasing and store data on cloud computing networks. Cloud networks have revolutionized the way people store data, limiting the need for investing in costly hardware servers and mainframes. IDC projects that cloud computing would reach a value of $107 billion by 2017. The industry was estimated to have a value of roughly $47 billion back in 2013. The market would underscore a 23.5% annual growth rate over the foreseeable future, meaning the industry would be highly profitable for those who make a timely entry.

Struggling to penetrate and establish a foothold in this market, IBM is on an acquisition spree and acquired SoftLayer Technologies Inc. for a full cost of $2 billion in June 2013.The company also bought Cloudant Inc. towards the end of the first quarter of the present year. IBM is investing $1 billion in its Watson Group as of now and another $1.2 billion investment is intended to expand its global cloud computing footprint to 40 data centers worldwide in 15 countries across five continents.

Furthermore, the company sold its customer care unit to Synnex Corp. (NYSE:SNX) in exchange for $430 million in cash and $75 million worth of the acquirer's stock. Approximately 20% of those proceeds have been realized in the recently ended quarter, which cushioned the downfall in revenues to some extent.

There is further discussion going on regarding IBM's server business sale to China's Lenovo Group Ltd. (OTCPK:LNVGY) for $2.3 billion, more than 85% of which will be paid in cash. The deal is awaiting government approval as of now, ensuring officials that China would not gain access to U.S. secrets and infrastructure upon completion of the sale. The deal benefits both companies; particularly in IBM's case, the divestiture would make the company more focused on its relatively profitable system and software businesses.

Investor Returns to Hike

IBM excels at rewarding its shareholders. Presently, the company's dividend yield is around 1.93 in an industry where 1.08 is the norm. IBM is due to announce its next dividend hike and the company's dividends have increased at a CAGR of 73% over the past five years.

To return further capital to its investors, the company escalated its share repurchases over the previous quarter and retired 82 million shares worth $8 billion enhancing per share value and increasing the remaining investors' voting rights by manifold.

Concluding Remarks

IBM is smartly investing in the growing market of cloud computing and divesting its less profitable businesses. As the company divests under or low performing businesses, the overall business portfolio of the company will strengthen and begin to generate a stable stream of revenues. The company generously rewards its shareholders with increasing revenues and methodical share repurchases. With these credentials I'd recommend investing in the company's stock for the long term. As revenues begin to stabilize its stock price will definitely increase.

Source: IBM's Smart Business Choices Will Pay Off