International Business Machines Corporation (IBM 131.91, +9.39, +7.66%)is trading higher today following its Q4 earnings report last
night. Non-GAAP EPS fell 5% yr/yr to $4.87, but that was above market
expectations. Revenue fell 3.5% yr/yr to $21.76 bln, which was basically
in-line. The guidance was quite good as IBM sees 2019 non-GAAP EPS of at least
$13.90, which is better than expected. Free cash flow is expected around $12
While Q4 revenue and EPS were down yr/yr, 2018 on a full year basis marked an important milestone: Non-GAAP EPS grew 1% to $13.81 while revenue was up 1% to $79.6 bln. What's notable is that IBM grew revenue, pre-tax profit, and EPS for first time in six years. Not a lot of growth, but it was higher than last year, reversing a multi-year trend. The 2019 EPS guidance points to another year of growth.
IBM has been in turnaround mode since IBM has historically been a hardware-based, large mainframe type business. But the world is changing. Enterprise customers have been moving to the cloud and network virtualization. Also, competition has gotten more intense over the years as younger upstarts have been built from the ground up on cloud, mobility, virtualization etc. Amazon (AMZN) has been very successful with its public cloud computing offering. IBM has had trouble adapting to this new world and its profits have been declining for years.
IBM has taken steps to evolve by focusing more on software, services, systems, and they have been marketing themselves as a provider of integrated solutions. Their key areas of focus are cloud, analytics, mobile, cybersecurity, social media etc.
IBM also made a big splash in cloud with its recent announcement that it will acquire Red Hat (RHT), the world's largest provider of open source cloud software for $34 bln. IBM sees the deal as a game-changer as it's all about accelerating hybrid cloud adoption. The bulk (80%) of client business has yet to move to the cloud, held back by the proprietary nature of today's cloud market. With IBM's huge scale in combination with the largest open source software provider could be well poised to tackle this opportunity. IBM says the client response to the Red Hat announcement has been overwhelmingly positive.
Turning to the Q4 results, total software revenue was up 2%, driven by hybrid cloud adoption and strong demand for analytics and AI offerings. Total services revenue was up 2%. IBM had steady improvement in Global Business Services (GBS) throughout the year, with 6% growth in Q4, and revenue growth across all three GBS business lines. Global Technology Services (GTS) had a modest revenue decline. On the call, IBM said it had a great signings quarter, reflecting strong demand for hybrid cloud implementations. However, hardware revenue was down but IBM was lapping a terrific 4Q17, fueled by IBM Z. So that made the comps more difficult.
The company seems to be making inroads in cloud as 2018 cloud revenue rose 12% in 2018 to $19.2 bln. As-a-service annual exit run rate for cloud revenue was $12.2 bln in the quarter, up 18% yr/yr. Again, the Red Hat acquisition should have a nice tailwind effect on cloud revenue once that deal closes.
Overall, this was a good quarter for IBM. Again, it's important to step back and look at IBM's longer term performance. In 2018, IBM grew revenue, pre-tax profit and EPS for first time in six years. Also, IBM stabilized margins as it moved through the year, and it grew gross and pre-tax margin in Q4. IBM is clearly shifting its business toward higher-value areas, like hybrid cloud and AI, including the Red Hat announcement. The stock came under pressure in October as the tech sell-off impacted a bunch of names, including IBM. However, the stock has been recovering nicely since then.
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