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IBM Still Awaits Benefits of the Turnaround

Posted on Thursday, Apr 20th 2017


For the first time in the last five quarters, IBM (NYSE: IBM) missed revenue expectations for the quarter. The market is understandably unhappy, and the stock has plunged more than 5% in the after-hours trading session.

IBM’s Financials
This was also the 20th consecutive quarter that IBM posted a revenue decline. Revenues for the first quarter fell 3% to $18.16 billion compared with the Street’s forecast of $18.396 billion. Adjusted earnings of $2.38 for the quarter were better than the Street’s estimates of $2.35. The earnings beat was driven by IBM’s continued drive to manage costs. Operating expenses reduced by 20% in the quarter, primarily due to headcount rationalization initiatives. However, it increased its spend on R&D initiatives which grew 5% over the year.

By segment, revenues from Cognitive Solutions grew 2.1% to $4.1 billion, driven by growth in analytics and security. The Cognitive Solutions segment includes revenues from IBM’s Watson initiative. Global Business Services revenues were down 3% at $4 billion despite a double-digit growth in the strategic imperatives division which includes the cloud and mobile practices. Technology Services & Cloud Platforms revenue fell 2.5% to $8.2 billion and Systems revenues fell 17% to $1.4 billion. Global Financing revenues were down 1% to $405 million.

For the quarter, strategic imperatives revenues grew 12% to $7.8 billion. On a trailing twelve-month basis, strategic imperatives revenues came in at $33.6 billion, accounting for 42% of its total revenues for the period. Cloud revenues came in at $14.6 billion and Cloud-as-a-Service annual exit run rate grew 59% to $8.6 billion in the quarter.

IBM reassured the market that it was still forecasting an operating EPS of at least $13.80. The market was looking for a full year EPS forecast of $13.78.

IBM’s Growth Engines

While the numbers may not seem impressive, IBM is confident of a bounce back as it continues to invest in the new growth segments of cognitive solutions: cloud and mobile technology. As part of this focus, it has been tying up with several other tech players. Earlier this week, it announced that it is working with Continuum Analytics to offer Anaconda, a leading Open Data Science platform, on IBM Cognitive Systems. Anaconda will integrate with the PowerAI software distribution for machine learning and deep learning to simplify and accelerate Power performance and GPU optimization for data intensive cognitive workloads. Anaconda has had more than 16 million downloads to provide businesses with the ability to transform data into actionable information by identifying data patterns.

To attract more enterprise customers to its cloud business, IBM announced that it will now offer the latest Nvidia GPU and the Tesla P100 in the IBM Cloud. The arrangement will make IBM the first to offer Nvidia’s latest processors. It also entered into a tie-up with Comcast so that Comcast Business customers can get up to 10 Gbps of private network connectivity to IBM Cloud for public, private, or hybrid cloud deployments. Organizations will now be able to connect directly to the cloud via dedicated connectivity for improved performance, security, and availability.

It also announced the release of the world’s first commercial quantum-computing service. Unlike the binary model of computing, Quantum computers use the counter-intuitive properties of subatomic physics, in which bits of information assume multiple states simultaneously. IBM has been working on the development of these qubit-based algorithms for a while, and believes that quantum computers could perform certain tasks exponentially faster than classical computers can. Known as IBM Q, the quantum computers from IBM will be available to use over the cloud for a fee. The system has been available on the Internet since May last year, but recently received an upgraded user interface. The current version of IBM Q will grant access to developers on a five-qubit system. But IBM plans to improve its computing capability to 50 qubits in the next few years. For now, IBM does not hope to make big money out of the system and is counting on growing the offering to help in the areas of drugs discovery, logistics, finance, security, and artificial intelligence.

Its stock is trading at $161.69 with a market capitalization of $151.5 billion. It touched a 52-week high of $182.79 in February this year. It had fallen to a 52-week low of $142.50 in June last year.

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