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Is the Cloud Strategy Delivering for IBM?

Posted on Thursday, Jan 23rd 2020

IBM (Nasdaq: IBM) delivered a surprising performance for its fourth quarter. Not only did the company manage to surpass market expectations, but also delivered a y-o-y growth in revenue – a first for it in the last six quarters.

IBM’s Financials
Revenues for the fourth quarter grew a very modest 0.1% $21.78 billion. The market was looking for revenues of $21.64 billion. Adjusting for currency swings, IBM’s revenues would have grown 3% over the year. Net income was $3.67 billion, or $4.11 per share, compared with $1.95 billion, or $2.15 a share, a year ago. On an adjusted basis, EPS was $4.71, ahead of the market expectations of $4.69.

Cloud and cognitive software revenue was $7.24 billion, ahead of the market’s forecast of $7.14 billion. Red Hat accounted for $0.5 billion of revenue for the quarter. Systems revenue of $3.04 billion was also ahead of the expected $2.83 billion. Global technology services revenue was $6.95 billion, missing the Street’s forecast of $7 billion and Global business services revenue was short at $4.24 billion compared with the expected $4.27 billion.

IBM ended the year with revenues falling 3% to $77.1 billion and a non GAAP EPS of $12.81.

For the current year, IBM expects to end with GAAP diluted earnings per share of at least $13.35, ahead of the market’s forecast of $13.28 per share.

IBM’s Cloud Focus

During the previous year, IBM has been focusing on driving its cloud revenues. It ended last year with its cloud revenues growing 11% to $21.2 billion driven by its earlier acquisition of Red Hat. IBM believes that the next round of cloud growth will be on account of mission critical workloads being managed in a hybrid multi-cloud environment. These workloads will be based on a foundation of Linux with Containers and Kubernetes. It is confident that it is well prepared to meet that demand. Last quarter, it introduced Cloud Paks, a cloud-native software offering that simplifies deployment, reduces operational costs, and allows clients to build once and run anywhere. It integrates IBM’s middleware, AI, management and security, and Red Hat’s OpenShift platform.

Besides building its own product offerings, IBM is also expanding its partnerships with other cloud-based service providers. It expanded its tie-up with Workday and Box recently as part of this initiative. Workday is committed to using Red Hat and IBM Cloud as a key component of its delivery infrastructure, and Box will use Red Hat to power its IT infrastructure and Watson as its preferred AI provider for intelligent business processes. Additionally, IBM and Box are working together to deliver joint solutions for governance, security, and AI capabilities.

The market was pleased with IBM’s performance, and the stock climbed 4% in the after-hours session. IBM’s stock is currently trading at $139.17 with a market capitalization of $123.3 billion. It touched a 52-week high of $152.95 in July last year. It hit a 52-week low of $121.54 in May last year.

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