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International Business Machines (IBM - Free IBM Stock Report), a worldwide supplier of computer software, services, and systems hardware, and a component of the Dow 30, turned in another quarter of lower revenues and earnings in the March period. Investors who were hoping for signs that the technology giant might be turning the corner were clearly disappointed and bid the stock down 5% in early morning trading.

The company reported earnings of $1.85 a share in the March period, compared to our estimate of $2.00 and year-earlier results of $2.09. Reported results included $0.53 a share of acquisition and retirement costs compared to only $0.26 of such so-called nonoperating expenses in the like period of 2016.

Revenues slipped 3%, or 2% on a constant-currency basis. Cognitive Solutions (software) was a bright spot, reporting a 3% revenue increase, led by analytics and security products. Cloud computing offerings rose 45%. Companywide revenues from strategic initiatives, like cloud computing, have risen 13% in the past 12 months, with especially strong growth in Cloud as-a-service, and now account for 42% of IBM's revenues. Nonetheless, the growth in strategic solutions revenues is not yet offsetting declines in more traditional areas.

Meanwhile, Cognitive Solutions gross margins, though still wide, contracted nearly five percentage points, hurt by continued high investment spending and an unfavorable business mix.

Global Business Services revenues fell 2%, hurt by declines in consulting and on-premise enterprise application work. The Technology Services and Cloud Platforms segment also reported a 2% top-line decline. Gross margins in both the Business Services and Technology Services groups benefited from past investments in the businesses. 

Finally, Systems segment revenues plunged 16%, as IBM's z Systems and Power systems are now in a late-product cycle phase. But Storage systems that incorporate Flash memory technology turned in a positive performance.

Despite the weak March-quarter showing, IBM still expects to earn at least $11.95 a share in 2017, including $1.85 of nonoperating costs. It looks to earn about 37% of this year's results in the first half, which would imply a pickup in the June quarter (though possibly another unfavorable year-to-year quarterly comparison). 

Management looks for further improvement in the second half, supported by new Systems products, lower Systems development spending, and less dilution from last year's large acquisitions. IBM also expects to sign a few of the larger Technology Services contracts that didn't close in the March quarter. And it expects Business Services to make more operating progress. 

For now, we are maintaining our 2017 and 2018 share-net estimates of $11.95 and $12.10, respectively. But we caution investors that the stock may be vulnerable should results not live up to management's expectations. With the timing of the company's long-awaited turnaround uncertain and the blue chip issue trading just below its 3- to 5-year Target Price range, the stock's total return potential to 2020-2022 is underwhelming. But IBM's attractive dividend yield may appeal to patient, income-oriented investors.

About The Company: International Business Machines is a worldwide supplier of computer systems, services, and software. Revenues in 2015 can be broken down as follows: Global Technology Services, 39%; Global Business Services, 21%; Systems Hardware, 9%; Software, 28%; Global Financing, 3%. Foreign business accounted for 53% of 2015 revenues. 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.