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IBM Continues a Slow Climb Up

Posted on Friday, Jul 20th 2018

IBM’s (NYSE: IBM) long turnaround appeared to slow down during the recently reported quarterly results. While the company did manage to surpass market expectations, the slowing growth rates left the market wanting.

IBM’s Financials
Revenues for the second quarter grew 4% to $20 billion, ahead of the Street’s forecast of $19.62 billion. Adjusted earnings of $2.8 billion or $3.05 per share for the quarter were also better than the Street’s estimates of $3.03.

By segment, revenues from Cognitive Solutions, which includes solutions software and transaction processing software, was flat over the year at $4.6 billion. Global Business Services revenues grew 2% to $4.2 billion. Technology Services & Cloud Platforms revenues of $8.6 billion were up 2% over the year driven by hybrid cloud services, security, and mobile divisions. Systems revenues grew 25% to $2.2 billion driven by growth in IBM Z, Power Systems, and Storage. Global Financing revenues were down 5% to $394 million.

This was the first quarter that IBM derived more than half of its revenues from strategic imperatives areas. During the quarter, strategic imperatives revenue for the last 12 months grew 15% to $39 billion and accounted for 48% of the company’s revenues. Cloud revenues for the trailing twelve months grew 23% to $18.5 billion.

IBM ended the quarter with $10.7 billion in cash and cash equivalents.  It returned $2.4 billion to shareholders through $1.4 billion in dividends and $1.0 billion in gross share repurchases during the quarter.

IBM expects to end the current year with an EPS of $13.80, which was short of the market’s forecast earnings of $13.78 per share.

IBM’s Cognitive Solutions Slow Down

Overall, IBM’s numbers looked impressive. But the market was worried about the slowing growth rates of the Cognitive Solutions segment. IBM reported flat revenues for the segment at $4.6 billion. But the market was looking for revenues of $4.76 billion. This segment drives the highest margins for the company and with flat quarterly revenues, it resulted in declining gross margins for IBM. IBM reported gross margins of 46.5% against 47.1% a year ago, and 47% as expected by the market.

IBM tried to explain the miss in the segment claiming that it was pressured by “transitions” in talent, collaboration, and commerce software businesses as it is working on modernizing its offerings in those fields.

IBM’s Growth Initiatives

IBM continued to invest in its strategic initiatives through acquisitions. Recently, it announced the acquisition of Oniqua, a global innovator in Maintenance Repair and Operations (MRO) Inventory Optimization solutions and services. It focuses on mining, oil & gas, transportation, utilities, manufacturing, and other asset-intensive industries. Denver-based Oniqua is known for its solution that provides a single view of the truth for MRO spares inventory. IBM will be able to leverage Oniqua’s platform to drive growth in its asset optimization business by adding the capability to provide one data source around all company assets to ensure 24/7 operational efficiency. It plans to integrate Oniqua’s offering with its Maximo and Tririga solutions to provide consistency and data accessibility across the business. Financial terms of the acquisition were not disclosed.

IBM also continued to drive growth in emerging areas like blockchain. It has now provided the market with more than 60 active blockchain networks. It also launched We.trade, the first live blockchain-based, bank-to-bank trading platform. We.trade already has nine large banks signed up for the service, including Deutsche Bank, HSBC, KBC, and Natixis.

IBM is slowly heading in the right direction as it continues to focus on the strategic imperatives segment. But it may need to accelerate these investments before the market loses its patience. The stock has recorded a decline of 3% so far this year and has underperformed the S&P 500 by about 20% in the last twelve months.

Its stock is trading at $149.24 with a market capitalization of $132.7 billion. It touched a 52-week high of $171.69 in January this year. It had fallen to a 52-week low of $139.13 in August last year.

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