Valuing IBM's Software Franchise
Zero Gravitas • 132 Comments
Zero Gravitas • 132 Comments
IBM's 21st Century Transition Is Failing
Peter E. Greulich • 256 Comments
Peter E. Greulich • 256 Comments
Mon, Jul. 18, 4:09 PM
Sun, Jul. 17, 5:35 PM
Mon, Apr. 18, 4:44 PM
- IBM's official Q1 tax rate was -95.1%, thanks to a $1.2B benefit related to a $1B refund of previously-paid U.S. taxes. That yielded official tax payments of -$983M, and helped EPS beat estimates in spite of a 170 bps Y/Y drop in gross margin to 46.5% and $1.5B worth of expenses related to "workforce transformation, real estate actions, and actions in Latin America."
- Segment performance: IBM has revised its segment reporting structure. Cognitive Solutions (solutions software + transaction processing software) revenue fell 1.7% Y/Y to $4B, with op. margin dropping to 21.8% from 32.6%. Global Business Services revenue -4.3% to $4.1B, with op. margin dropping to 4.5% from 13.2%.
Tech Services & Cloud Platforms revenue -1.5% to $8.4B; op. margin dropped to 3% from 13%. Systems (hardware) revenue -21.8% to $1.7B (the mainframe upgrade cycle played a role); op. margin dropped to -0.5% from 11.3%. Global Financing revenue -11.2% to $410M; op. margin fell to 43.1% from 49.2%.
- Other details: 1) Unlike in prior earnings reports, IBM hasn't broken out its geographic performance or services backlog, or broken out sales growth for various hardware and software businesses. 2) "Strategic imperatives" revenue (cloud, analytics, and "engagement") rose 14% Y/Y to $7B (compares with a 5% drop in total revenue to $18.7B). 3) The annual "cloud delivered as a service" revenue run rate (boosted some by M&A) rose 42% Y/Y to $5.4B. 4) Mobile revenue rose 88% Y/Y, security 18%, and analytics 7%. 5) Forex had a 300 bps impact on revenue growth (-5% vs. -2%).
- Financials: $900M was spent on buybacks. Thanks partly to the aforementioned expenses, SG&A spend rose 12% Y/Y to $6.01B, and R&D spend 12% to $1.46B. That contributed to a drop in op. margin to 5.5% from 15.3%. Free cash flow was $2.3B, up from $1.1B a year ago. IBM ended Q1 with $14.9B in cash and $18.8B in non-Global Financing debt.
- IBM -2.6% after hours to $148.50.
- IBM's Q1 results/2016 guidance, earnings release
Mon, Apr. 18, 4:12 PM
- International Business Machines (NYSE:IBM): Q1 EPS of $2.35 beats by $0.26.
- Revenue of $18.68B (-4.6% Y/Y) beats by $400M.
- Maintains guidance for 2016 EPS of "at least" $13.50. Consensus is at $13.54.
- Now expects 2016 free cash flow to be at high end of $11B-$12B guidance range.
- Shares +1.2% after hours.
- Press Release
- Update: IBM finished after hours trading down 5.1%. More details on the Q1 report can be found here.
Mon, Apr. 18, 7:59 AM
- Barclays recommends investors trim their IBM (NYSE:IBM) stakes ahead of this afternoon's earnings report.
- Shares are +26% over the past 60 days. "We do not expect IBM’s long-term revenue growth struggles to dissipate, which could pressure the stock after the recent “hope rally.”"
- "Do not be swayed by any headline EPS beat: IBM’s results stand to benefit from a Japan-based tax credit of ~$1B, which our model excludes. Fx headwinds could moderate as well, given currency movements in the last month. Meanwhile, our conversations with industry participants indicate that IBM is pursuing a fairly aggressive cost take-out program to adjust for cloud-related pressures on operating margin."
- But what really matters is... "It is all about software growth. Currently, we do not expect the middleware business to exhibit signs of recovery, based on conversations with industry participants. If middleware declines Y/Y at constant currency for the third quarter in a row in Mar-Q, investor sentiment could reset lower."
- Firm's price target is $125. Implied downside 18%.
- Now read IBM's 21st Century Transition Is Failing »
Sun, Apr. 17, 5:35 PM
Wed, Jan. 20, 3:26 PM
- Three months ago, IBM (IBM -4.6%) fell towards $140 after providing a 2015 EPS guidance cut to go with mixed Q3 results. Today, shares are almost $20 lower as markets react to the light 2016 guidance - EPS of "at least" $13.50, free cash flow of ~$11B-$12B vs. 2015's $13.1B - issued with Big Blue's slight Q4 beat. The S&P is down 0.5%, and the Nasdaq up 0.5%.
- Plenty of analyst have (unsurprisingly) cut their targets, but none have downgraded. Aside from forex pressures (expected to hurt 2016 EPS by over $1 as hedges roll off), plenty of concerns have been voiced about IBM's software ops, which were responsible for 46% of the company's 2015 segment op. profit ($9.1B out of $19.7B) and have been hurt by weak deal activity among top-250 clients.
- Jefferies' James Kisner (Underperform, $110 target) argues IBM still faces a tough transition as on-premise software and IT services demand continues to be pressured by SaaS/cloud adoption. He also estimates Q4 EPS would've been $4.54 (below a $4.81 consensus) if not for a lower tax rate, and states services signings of $16.7B fell short of a $19.1B consensus.
- RBC's Amit Daryanani (Neutral, $135 target): "Based on tepid EPS/[free cash flow] guide and continued software declines, and System-Z entering the end of the mainframe cycle, we continue to stand on the sidelines." Drexel Hamilton's Brian White (Buy, $160 target) remains bullish, calling EPS guidance conservative and talking up IBM's 4.1% dividend yield.
- Separately, Fortune reports IBM is in advanced talks to buy Ustream, a provider of live video streaming, transcoding, and delivery services for businesses, for $130M in cash + possible earn-out/retention payments. The report follows IBM's December acquisition of cloud video infrastructure service provider Clearleap, which the company plans to integrate with its existing cloud offerings.
- Fortune notes IBM and Ustream are already partners, with Ustream's offerings already integrated with IBM's Bluemix cloud app development platform. The startup's customers include Sony and NASA.
- Prior IBM coverage, earnings call transcript
Tue, Jan. 19, 5:42 PM
- IBM has guided on its Q4 earnings call (webcast) for 2016 EPS of "at least" $13.50. Consensus is at $15.00.
- Forex is expected to have an even larger impact on 2016 results than on 2015 results, thanks partly to the rolloff of forex hedges. Big Blue also notes software sales have been pressured by delayed signings for large deals and mix changes.
- IBM has dropped to $122.90 after hours, falling to its lowest levels since 2010 along the way.
- IBM's Q4 results, Q4 details
Tue, Jan. 19, 4:57 PM
- Low tax rates continuing providing IBM an EPS lift: Big Blue's Q4 non-GAAP tax rate was 14.7%, down from 21.8% a year ago thanks to "current period discrete items."
- Also helping: SG&A spend fell 15% Y/Y to $5.2B, thanks to a mixture of job cuts, asset sales, and forex. R&D spend rose 3% to $1.4B. Gross margin fell 120 bps to 52.7%.
- Segment performance: Global Tech Services revenue -7.1% Y/Y to $8.1B; op. profit +4.5% to $1.5B. Global Business Services -9.9% to $4.3B; op. profit -8.6% to $4.3B. Software -10.7% to $6.8B; op. profit -21.4% to $3B. Hardware -1.4% to $2.4B; op. profit -10.1% to $349M. Global Financing -14.6% to $454M; op. profit +28.3% to $674M.
- Geographic performance: Americas revenue -8% Y/Y to $10.3B. EMEA -9% to $7.3B. Asia-Pac -10% to $4.4B. BRIC markets down 21%. Forex had a 700 bps impact on revenue growth (-9% vs. -2%).
- Other details: 1) The quarter-ending services backlog was down $7B Y/Y to $121B; it was up 1% adjusting for forex. 2) "Strategic imperatives" (cloud, analytics, mobile, social, and security) revenue growth slowed to 10% Y/Y from Q3's 17%. For 2015, strategic imperatives were 35% of total revenue. 3) "Cloud delivered as a service" revenue rose 50% in 2015 to $4.5B, and analytics revenue 7% to $17.9B. 4) Middleware revenue fell 10% in Q4 to $4.9B. 5) Mainframe revenue (boosted by upgrade cycle) +16% in Q4; Power systems +4%; storage -11%.
- Financials: $764M was spent on buybacks in Q4, bringing the full-year total to $4.6B. 2015 free cash flow was $13.1B, up $700M Y/Y. IBM ended Q4 with $8.2B in cash, and $12.7B in non-Global Financing debt.
- IBM -0.7% after hours to $127.20.
- IBM's Q4 results, earnings release
Tue, Jan. 19, 4:10 PM
Mon, Jan. 18, 5:35 PM
Oct. 20, 2015, 1:04 PM
- IBM (IBM -5.8%) is at its lowest levels since 2010 after providing a 2015 EPS guidance cut to go with mixed Q3 results, and reporting continued top-line pressures in many key businesses. A slew of firms have cut their targets, but none have downgraded.
- On the earnings call (transcript), CFO Martin Schroeter stated Q3 sales were pressured by a longer-than-expected "transformation" timeframe for Global Business Services (GBS) "as the market shifts away from some of the more traditional application areas" (due to cloud adoption?), as well as weak storage demand amid growing industry adoption of flash arrays - that's potentially a positive for newly-public flash array vendor/IBM rival Pure Storage (PSTG +2.4%).
- Schroeter also mentioned transactional software revenue weakened towards the end of Q3, and that both GBS and transactional challenges will weigh on Q4. GBS revenue fell 13% Y/Y in Q3, storage revenue 19%, and software revenue 10%. Excluding forex, the declines were 5%, 14%, and 3% (suggestive of moderate share loss). Software accounted for 43% of IBM's Q3 op. profit.
- Stifel's David Grossman (Buy, target cut by $20 to $160): "We wonder whether the significant downward revision to guidance reflects an attempt to reset the bar for next year ... We have lowered our 2015 EPS from $15.71 to $14.75 (consensus was $15.67) and 2016 from $16.36 to $15.30 (consensus $16.04), which assumes flattish revenue growth in 2016 (versus down ~1% in 2015) and pretax margin expansion of 60bp (versus down 100bp in 2015). It will be difficult to grow [free cash flow] in 2016 on this EPS base, which suggests the stock could remain in a trading range of high $135-$145, pending the 4Q report."
- Bernstein's Toni Sacconaghi (Market Perform, target cut by $10 to $140) thinks 2016 could be even tougher than 2015, given a declining services backlog, the rolloff of currency hedges, a lack of a mainframe/Power system upgrade cycle, lower "non-operating gains," and ongoing strategic investments. He sees EPS dropping to $14.30 in 2016 - revised 2015 guidance is at $14.75-$15.75 - with cash flow "potentially declining more moderately than EPS."
- Prior IBM coverage, SA IBM earnings analysis
Oct. 19, 2015, 4:36 PM
- Helping IBM beat Q3 EPS estimates in spite of a revenue miss: The company had a non-GAAP tax rate of 18%, up slightly from Q2's also depressed 17.2% but down from 20.8% a year ago.
- Also helping: 1) SG&A spend fell 10% Y/Y to $4.7B thanks to job cuts and forex, and R&D spend fell 5% to $1.3B. 2) Gross margin from continuing ops rose 80 bps Y/Y to 50%. 3) $1.5B was spent on buybacks.
- Free cash flow rose 18% Y/Y to $2.6B. However, IBM now expects 2015 FCF to be "relatively flat" compared with 2014's $12.4B. It guided in July for a "modest increase."
- Segment performance: Global Tech Services revenue -10% Y/Y to $7.9B; op. profit -22% to $1.3B. Global Business Services revenue -13% to $4.2B; op. profit -22% to $673M. Software revenue -10% to $5.1B; op. profit -19% to $1.9B. Hardware revenue (hurt by the x86 server unit sale) -39% to $1.5B; the business had a $24M op. loss. Global Financing revenue -8% to $447M; op. profit +18% to $562M. Forex had a 9% impact on total revenue growth, and the x86 sale a 4% impact.
- Geographic performance: Americas revenue -10% Y/Y to $9.1B. EMEA -16% to $6.1B. Asia-Pac -19% to $4.1B.
- Other details: 1) The quarter-ending services backlog fell by $4B Q/Q and $10B Y/Y to $118B. 2) Revenue from BRIC markets fell 30% Y/Y (7% exc. forex and the x86 sale). 3) Middleware revenue -7%, mainframes (boosted by upgrade cycle) +15%, Power systems -3%, storage -19% (share loss). 4) "Cloud delivered as a service" revenue" is on a $4.5B/year run rate, the same as Q2 and up from $3.1B a year ago. 5) Analytics revenue rose 9%, and total "strategic imperatives" revenue (cloud, security, analytics, mobile) 17%.
- IBM ended Q3 with $9.6B in cash and $13.7B in non-Global Financing debt.
- IBM -4% after hours to $143.24. Earnings call at 5PM ET (webcast).
- IBM's Q3 results/guidance cut, PR
Oct. 19, 2015, 4:07 PM
- International Business Machines (NYSE:IBM): Q3 EPS of $3.34 beats by $0.04.
- Revenue of $19.28B (-13.9% Y/Y) misses by $340M.
- Cuts 2015 EPS guidance to $14.75-$15.75 from prior $15.75-$16.50. Consensus is at $15.68.
- Shares -3.7% after hours.
Oct. 18, 2015, 5:35 PM
International Business Machines Corp. is an information technology company, which provides integrated solutions that leverage information technology and knowledge of business processes. The company operates its business through five segments: Global Technology Services, Global Business Services,... More
Industry: Diversified Computer Systems
Country: United States
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