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IBM Q1 Earnings Surpass Estimates, Revenues Miss, Down Y/Y

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International Business Machines Corp IBM delivered first-quarter 2019 non-GAAP earnings of $4.87 per share, which surpassed the Zacks Consensus Estimate of $2.21. However, earnings per share (EPS) decreased 8.2% from the year-ago quarter.

Revenues of $18.18 billion missed the Zacks Consensus Estimate of $18.52 billion and declined 4.7% on a year-over-year basis. At constant currency (cc), the metric dipped 0.9%. The year-over-year revenue decline can primarily be attributed to currency fluctuation and headwinds from IBM Z product cycle. Also, softness in the emerging markets of Asia Pacific affected the top-line performance.

Notably, IBM stated that signings declined 14% on cc basis in the first quarter to $7.6 billion. Services backlog declined 2% year over year and totaled $111.6 billion.

In a year’s time, shares of IBM have lost 2.5% compared with the industry’s 0.5% decline.

 

Geographic Revenue Details

Revenues from Americas decreased 1% on cc basis, reflecting the headwind from the IBM Z product cycle. The same from Europe, Middle-East and Africa were flat year over year, whereas Asia-Pacific revenues declined 2% on a year-over-year basis.

Structural Changes

Starting from first-quarter 2019, IBM combined Cloud business and Cognitive Software in one segment.  Further, the company merged security services with security software.

IBM also integrated all divested business to the other categories in order to provide enhanced transparency to the software and GBS segments. The divested business includes pending sales of seven software products to HCL, the sale of IBM’smarketing platform and commerce software offerings to Centerbridge and the recently concluded sale of Seterus mortgage servicing business.

Cloud & Cognitive Software Segment

The Cloud & Cognitive Software segment’s revenues-external improved 2% year over year (on cc basis) to $5 billion. Revenues at Cloud & Cognitive Software (including cloud and data platform, Cognitive application and transaction processing) increased primarily owing to growth in application driven by security and solutions, growth in data and analytics as well as artificial intelligence (AI).

Segmental revenues pertaining to Cloud increased 10%. Cloud as-a-service revenue annual run rate was $2.1 billion.

Revenues from cloud and data platforms increased 2% year over year.

IBM stated that the integration of AI into offerings like customer experience analytics in commerce domain and increased adoption of IBM Cloud Private, which is built on Linux containers and kubernetes. It also added that analytics performed well in the quarter under review, courtesy of data science offerings and IBM Cloud Private for Data offering.

Furthermore, IBM witnessed growth in industry verticals like health, key areas of analytics and security in the quarter. Watson Health witnessed broad-based growth in Payer, Provider, Imaging and Life Sciences domains.

Revenues from Cognitive Applications were up 4% year over year, driven by security, health, supply chain and weather. Security growth was backed by offerings in orchestration, data security and endpoint management.

Transaction Processing Software includes software that runs mission-critical workloads, leveraging IBM’s hardware platforms. Revenues were flat on a year-over-year basis.

Global Business Services Segment

Revenues from Global Business Services-external segment totaled $4.1 billion, up 4% from the year-ago quarter. The year-over-year increase in the top line was primarily owing to growth across all three business areas namely consulting, application management and global process services.

Cloud revenues surged 25% year over year. Cloud as-a-service revenue annual run rate was $1.8 billion.

Application Management revenues were flat year over year. Global Process Services revenues climbed 5%. Moreover, Consulting revenues increased 9% year over year on solid performance of IBM’s digital business.

Global Technology Services Segment

Revenues from Technology Services-external decreased 3% from the year-ago quarter to $6.9 billion. Segmental revenues pertaining to cloud surged 13% from the year-ago quarter. Cloud as-a-service revenue annual run rate was $7.5 billion.

Infrastructure & Cloud Services’ revenues decreased 3% from the year-ago quarter. Also, Technical Support Services revenues declined 2% from the year-ago quarter.

Systems Revenues

Systems revenues decreased 9% on a year-over-year basis to $1.3 billion, primarily due to the impact of the IBM Z product cycle and stiff competition. Segmental revenues pertaining to Cloud revenues declined 15%.

IBM Z revenues decreased 38% year over year.

However, Power revenues increased 9% from the year-ago quarter. The upside can be mainly attributed to Linux and robust adoption across the latest POWER9-based architecture.

Meanwhile, storage hardware revenues declined on weak performance in both high end and mid-range, partially offset by strong growth in All Flash Arrays. IBM stated that pricing pressure in the immensely competitive storage market is hurting revenues.

While Operating Systems Software revenues increased 5%, Systems Hardware slumped 14% from the year-ago quarter.

Finally, Global Financing (includes financing and used equipment sales) revenues decreased 19% year over year and 9% at cc to $417 million.

Operating Details

Non-GAAP gross margin increased 100 basis points (bps) from the year-ago quarter and came in at 44.7%. The gross margin benefited primarily from 160 bps expansion in services margin.

Operating expense (research & development expenses and selling, general and administration expenses) declined 10.6% year over year on realization of acquisition synergies and improving operational efficiencies. Currently, IBM continues to invest in rapidly growing fields like hybrid cloud, artificial intelligence (AI), security and blockchain.

Pre-tax margin from continuing operations expanded 320 bps on a year-over-year basis to 12.3%.

Non-GAAP operating margins from continuing operations contracted 90 bps and came in at 11%.

Balance Sheet & Cash Flow Details

IBM ended first-quarter 2019 with $18 billion in total cash and marketable securities compared with $11.9 billion in the previous quarter. Total debt (including current portion) was $49.9 billion, up from $45.8 million from the previous quarter.

IBM reported cash flow from operations (excluding Global Financing receivables) of $4.8 billion and generated free cash flow of $1.7 billion in the quarter under review.

Moreover, the company returned $2.3 billion to its shareholders through dividends and share repurchases. The company returned more than $10.3 billion to its shareholders through dividends and share repurchases for the full year.

At the end of the year, the company had $2.4 billion remaining under current buyback authorization.

Guidance

For 2019, IBM continues to expect non-GAAP EPS to be at least $13.90. The Zacks Consensus Estimate is currently pegged at $13.90.

IBM still anticipates 2019 free cash flow of $12 billion.

Zacks Rank & Stocks to Consider

IBM currently carries a Zacks Rank #4 (Sell).

Few better-ranked stocks in the broader technology sector are Yelp Inc. YELP, Xilinx, Inc. XLNX and Universal Display Corporation OLED, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Yelp, Xilinx and Universal Display is currently pegged at 18.6%, 12% and 30%, respectively.

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