For the 19th straight quarter, IBM (NYSE: IBM) has reported declining revenues. But the silver lining in the results was its performance in its strategic imperatives. The company saw strong growth for the cloud, analytics, mobility, and security businesses. The growth wasn’t enough to keep the market happy. Despite the company surpassing market expectations, the stock fell post the result announcement.
IBM’s fourth quarter revenues fell 1% to $21.8 billion compared with the Street’s forecast of $21.6 billion. Adjusted earnings of $5.01 per share were also better than the Street’s estimates of $4.88 for the quarter. While the earnings beat was impressive, it cannot be ignored that IBM managed to achieve that due to Intellectual Property (IP) income. Excluding those, IBM’s net income would have fallen short at $4.83 per share, clearly signifying the margin pressure on the company.
By segment, revenues from Cognitive Solutions grew 1% over the year to $5.3 billion. Global Business Services revenues fell 4% to $4.12 billion. Revenues from the Technology Services & Cloud Platforms grew 2% to $9.31 billion. Systems revenues continued to report one of the biggest declines at 13% to $2.53 billion. Global Financing revenues were down 2% to $447 million and revenues from other sources grew 53% to $66 million.
IBM’s performance on its strategic imperatives, which include cloud, analytics, mobility, and security operations remained impressive. For the quarter, cloud revenues grew 33% with an annual exit run rate for cloud-as-a-service revenue growing from $5.3 billion to $8.6 billion. Revenues from analytics grew 9% and mobile grew 16%. Revenues from security increased 7% over the year. Overall for the year, revenues from strategic imperatives came in at $32.8 billion, accounting for 41% of the company’s revenues.
IBM ended the year with revenues falling 2% to $79.92 billion. Non GAAP net income for the year fell 11% to $13 billion.
For the current year, IBM expects operating EPS of at least $13.80 compared with the analyst forecast of $13.74.
IBM Watson Expands Market Reach
IBM is leveraging its acquisitions made in the previous quarter to expand market reach for Watson in newer industries. As part of that effort, it is targeting financial institutions, especially banks. It wants banks in Australia to adopt Watson for their regulatory compliance, risk identification, and activities targeting enhanced customer relationships. In October 2016, IBM had acquired Promontory Financial Group, a global market-leading risk management and regulatory compliance consulting firm, for an estimated $300 million. As expected, it is using the talent of more than 600 of Promontory’s professionals to train Watson by providing it with access to regulatory information as it is created through interaction in real-world applications. The new Watson is thus better enabled to deal with regulatory issues. But IBM is not the only one offering similar solutions. Google, for instance, has APIs that are freely available to banks to help them manage their regulatory technology requirements. Banks are looking at these open source options, instead of paying IBM’s more expensive license fee.
Besides financial institutions, IBM is also looking at deploying Watson to handle cyber security. In a beta test that will be conducted on 40 organizations, Watson will be used to test network cyber security. Watson for Cyber Security has the machine learning capabilities that will help it decide if an anomaly is a genuine anomaly or a malicious threat. Its vast database will help it decide if the security offense is related to a malware or a cybercrime campaign. Similarly, Watson will be able to identify if repeated failed log-ins by a user are genuine failures or attempts to break into the security. Additionally, it will also help strengthen security by identifying areas of vulnerabilities and the scope of the threat. While Watson may not be able to entirely do away with human interference, it will definitely make their work much simpler by prioritizing threats and helping in the decision making. This market is currently full of Cyber Security startups.
Its stock is trading at its 52-week high of $170.55 with a market capitalization of $165.8 billion. It had hit a 52-week low of $116.90 that it had fallen to in February last year. Watson and the other strategic initiatives, at some points, are expected to turn the revenue decline around. When that might happen is unclear at this point. But the analysts are hopeful as they continue to maintain a hold rating on the stock.
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