IBM Beats on Q4 Earnings

IBM IBM reported fourth-quarter results that beat CapIQ earnings consensus expectations--but top line performance weighed on overall results, as the company’s revenue came behind CapIQ consensus estimates. While we forecast a return to top line growth for IBM in the upcoming fiscal year, a meager annual growth of 1% year over year is the extent we expect. IBM’s largest and worst-performing segment, global technology services is still expected to be spun off by the end of fiscal 2021. We continue to believe this spin-off will only improve IBM’s remaining business in optics--as the separation should expose IBM’s other segments’ better growth and profitability profiles. We are maintaining our fair value estimate of $125 per share for the narrow-moat name, which leaves shares fairly valued, in our view.

In the fourth quarter, total revenue declined by 6% year over year to $20.4 billion--$0.2 billion under CapIQ consensus estimates. IBM’s cloud & cognitive software revenue declined by 5% year over year, as transaction processing platform revenue, which is tied to the cyclical nature of mainframe demand, declined significantly at 24% year over year as the software is. Red Hat revenue increased by 19% year over year, helping to moderate overall declines in the segment. Global technology services revenue decreased by 6% year over year likely due to the continuing shift of workloads to the public cloud--which makes such declines a mainstay, in our view. Global business services revenue decreased by 3% year over year largely due to decreased demand for IBM application management and consulting. We expect application management revenue to continue to dwindle as its weakness is a result of customers switching to management of cloud applications from on-premise. Systems revenue decreased by 18% year over year, which is not disturbing given the cyclical nature of the segment due to product launches. Financing revenue decreased by 5% year over year.

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