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, 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
Wed, Mar. 23, 1:39 PM
- At its GCP Next 2016 cloud user conference, Google (GOOG, GOOGL) has unveiled a Cloud Speech API that provides voice recognition services for third-party apps.
- The API supports 80+ languages, and can work in either real-time streaming and batch mode. Notably, Google (has made huge A.I./machine learning investments) says the API will rely on the same neural network powering voice search used by Google's search and keyboard apps. It will initially be free to use; Google plans to eventually charge, while offering low-cost pricing tiers.
- VR software leader Nuance (NUAN -4.2%), which claims an ecosystem of 30K+ developers, has sold off on the news. In December, Nuance unveiled its Mix platform, which provides developers working on mobile apps and IoT devices with SDKs that can be used to embed voice recognition and text-to-speech functionality.
- Also announced by Google: Cloud Machine Learning, a platform that allows developers using Google's cloud infrastructure to add A.I./machine learning functionality to their apps. The service could compete against IBM's Watson Developer Cloud platform.
Thu, Feb. 18, 10:27 AM
- Believing IBM's (IBM +5.7%) current valuation doesn't reflect the company's efforts to grow its cloud/analytics exposure, Morgan Stanley's Katy Huberty has upgraded to Overweight and set a $140 target.
- Huberty: "IBM Strategic Imperatives - data, cloud, engagement - now make up 35% of revenue and grew 17% in 2015, or 26% at constant currency, reflecting a faster-than-expected transformation to higher growth / higher value solutions. For comparison, Microsoft Cloud (Azure + Office 365) accounted for 36% of revenue and grew 20% in 2015. Yet IBM's share price reflects a perpetual decline in residual income, and these higher growth categories are undervalued based on our sum-of-the-parts (SOTP) analysis."
- Of note: While IBM's Strategic Imperatives revenue rose 17% in 2015, total revenue fell 9% (1% exc. forex) after adjusting for divestitures. Free cash flow rose by $700M Y/Y to $13.1B, but is forecast to drop to $11B-$12B in 2016.
- Regardless, Huberty expects the perceived disconnect between IBM's growth efforts and valuation to correct itself with the help of disclosures at IBM's Feb. 25 analyst day, stabilizing revenue, and improving free cash flow. She goes as far as to argue IBM "warrants a premium over other hardware companies that haven't invested heavily to transform to new computing paradigms," and predicts the company will deliver 2% annual free cash flow growth over the next two years (better than a consensus of -5%).
- Following Huberty's upgrade and news of the $2.6B Truven Health Analytics deal, IBM is a large-cap standout on a morning markets are nearly flat. Shares are now up 14% from last Thursday's 52-week low of $116.90. They trade for 9.4x a 2017 EPS consensus of $14.16.
Fri, Jan. 22, 12:33 PM
- IBM is nearing a "big move to improve its ties" with machine/log data analytics software leader Splunk (SPLK +2.6%), reports Northland Securities' Tim Klassell. He sees such a deal providing a "nice tailwind" for Splunk's efforts to win larger deals.
- FBR argued last month Splunk could be a 2016 IBM acquisition target, but it's worth noting Splunk would be much more costly than recent IBM analytics acquisitions. Regardless, Big Blue's "business analytics" revenue (covered a variety of analytics-related hardware, software, and services sales) totaled $17.9B in 2015 (up 7% Y/Y), and the company could provide Splunk with a massive army of sales, consulting, and IT personnel to sell and deploy the company's offerings.
- Splunk's current partner list includes Accenture, Cisco, Juniper, NTT, Palo Alto Networks, and VMware. Shares are moderately outpacing the Nasdaq's 2% gain.
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
Wed, Jan. 20, 11:47 AM
- Tech large-caps aren't being spared as the Nasdaq drops 2.6%, and the S&P 2.7%, in the market's latest plunge. A slew of companies with $10B+ market caps are seeing declines that on many recent days were largely reserved for smaller ex-momentum plays.
- The casualty list includes Alibaba (BABA -5.3%), and that of course means Yahoo (YHOO -6%) is along for the ride. Top Alibaba rival JD.com (JD -6.2%) is also down strongly; Chinese macro fears continue to run high.
- Facebook (FB -4.9%), which (unlike most peers) remains well above where it traded 12 months ago, has fallen towards $90. Q4 results arrive on Jan. 27.
- Cisco (CSCO -5.2%) has fallen below $23. Possibly weighing: Piper's Troy Jensen has reported weak Q4 networking reseller survey results, and predicts Cisco will issue light FQ3 (April quarter) guidance next month with its FQ2 report. His FQ3 sales estimate has been cut by $400M to $11.9B (below a $12.07B consensus).
- DRAM/NAND flash maker Micron (MU -10.3%) is among the biggest decliners, with shares falling into the single digits. Micron now trades for 6.6x an FY17 (ends Aug. '17) EPS consensus of $1.48. Online payments leader PayPal (PYPL -4.4%) is having a rough day as well.
- IBM (IBM -4.7%), meanwhile, has made new multi-year lows after providing soft 2016 EPS guidance to go with a slight Q4 beat. Netflix (NFLX -6%) has sold off in spite of reporting strong Q4 subscriber adds.
Wed, Jan. 20, 9:13 AM
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
Dec. 17, 2015, 4:50 PM
- Once the deal closes, IBM will deliver the manged app/hosting services currently provided by AT&T. The offerings will be "aligned" with IBM's cloud services portfolio.
- No details have been given yet about the deal's revenue impact, or about how much (if any) money is changing hands. It follows a Q3 in which IBM's global tech services revenue fell 10% Y/Y to $7.9B, and its global business services revenue 13% to $4.2B, amid cloud and forex pressures. The company is already a notable player in the managed app and hosting markets; its SoftLayer unit participates in the latter.
- Within its Business Solutions segment, AT&T's fixed strategic services revenue (has included hosting, Ethernet, cloud, VPN, and security services) rose 12.6% Y/Y in Q3 to $2.76B. That helped offset an 8.7% drop in legacy voice/data service revenue to $4.5B.
Nov. 4, 2015, 1:49 PM
- "Oh yeah, I love Amazon (AMZN +2.7%). Because they're investing in their future. [Jeff] Bezos is a serial monopolist," said famed hedge fund manager Stanley Druckenmiller at a Tuesday conference talk.
- Druckenmiller, who has been bearish on IBM for some time: "The last 19 quarters, Amazon has missed their quarterly earnings nine times. They don't give a damn ... IBM has missed three quarters since 2006. They really care about their quarterly earnings." (10-year chart of Amazon and IBM)
- He also once more praised AWS, which had revenue of $6.9B (+65% Y/Y) over the 12 months ending in September. "If you're starting a business today, you don't need a tech department, you don't need a back office, you can use AWS. By the way, it's just ripping to shreds the 10 or 15 consultants from IBM ... that you used to need, but you don't need because now you go into cloud."
- Amazon has made fresh highs. Shares are up 14% since the company's Oct. 22 Q3 beat, and up 107% YTD.
Oct. 28, 2015, 10:40 AM
- Confirming yesterday evening's WSJ report, IBM (IBM +2.2%) states it's buying The Weather Company's B2B, mobile, and cloud-based Web properties, including Weather.com and Weather Underground, Terms are undisclosed; the WSJ reported of a $2B+ purchase price.
- IBM suggests the value of The Weather Co.'s cloud data platform goes well beyond weather, and will bolster both its Watson Cloud platform and a new Watson IoT unit that will provide A.I.-driven analytics services for data produced by Web-connected embedded devices.
- IBM: "The Weather Company's cloud-based data platform will allow IBM to collect an even larger variety and higher velocity of global data sets, store them, analyze them and in turn distribute them and empower richer and deeper insights across the Watson platform ... The Weather Company's mobile and web properties handle seven times the volume of the world's leading search engine, while serving 82 million unique monthly visitors ... [The platform] can ingest a wide range of data at massive speed and scale, supporting an incredible volume of queries at very low latency."
- At the same time, IBM argues weather-related analytics is a major opportunity by itself, given weather's impact on global GDP. It notes The Weather Co.'s models "analyze data from three billion weather forecast reference points, more than 40 million smartphones, and 50,000 airplane flights per day," helping it service "more than 5,000 clients in the media, aviation, energy, insurance and government industries."
- In August, IBM struck a $1B deal to buy medical imaging software firm Merge Healthcare, with plans to integrate merge with its new Watson Health unit and deliver image analytics services. An IoT-related analytics partnership was formed with CPU core giant ARM in September.
- Shares are recovering some of the Tuesday losses seen following an SEC probe disclosure.
- Update: Forrester's Ted Schadler offers some thoughts on IBM's motivations for making the deal. "[B]usinesses need insights services injected into their real-time processes and applications. TWC gives IBM a hugely valuable and differentiated source of data and insights that it can pre-integrate with other major sources, including Twitter sentiment insights and Box's document market. By pre-integrating these data, building predictive and cognitive models on them, and blending them with your data, IBM is in a position to deliver differentiated insights services."
Oct. 27, 2015, 8:28 PM
- IBM is nearing a deal in excess of $2B to acquire the digital and data assets of The Weather Co., owner of the Weather Channel, The Wall Street Journal is reporting.
- The company -- owned in part by NBCUniversal (NASDAQ:CMCSA) along with Bain Capital and Blackstone (NYSE:BX) -- started hiring banks to seek a buyer in August for a deal it hoped would hit $3B. The company's digital bits were widely considered to be the most valuable.
- IBM has a particular interest in the company's forecasting group, WSI, the WSJ says -- a unit that's chock full of tech and weather data that the Weather Co. licenses to various businesses.
- The deal would reportedly come with Weather Co. CEO David Kenny, who would join IBM.
- A $2B deal would be a discount over the company's 2008 sale price, valued at $3.5B. IBM shares fell 4.1% today.
- Previously: IBM eyes digital assets of The Weather Company (Oct. 19 2015)
- Previously: Weather Channel hires banks to explore sale for up to $3B (Aug. 20 2015)
Oct. 27, 2015, 2:16 PM
- Buried within IBM's just-filed Q3 10-Q: "In August 2015, IBM learned that the SEC is conducting an investigation relating to revenue recognition with respect to the accounting treatment of certain transactions in the U.S., U.K. and Ireland. The company is cooperating with the SEC in this matter."
- IBM has already been cooperating with the SEC and other agencies on corruption-related probes. The SEC ended an investigation into IBM's cloud revenue reporting last year.
- Shares have sold off following Big Blue's disclosure.
- Earlier: IBM adds $4B to buyback, declares quarterly dividend
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, 5:39 PM
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
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
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