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IBM lifts its 22-quarter shrinking sales curse: Finally, a whole 1% uptick

Big Blue exits five-year skid, shares fall on uncertain future

For 22 quarters in a row, IBM's sales have been shrinking. But not any more. In the final three months of 2017, Big Blue's revenues grew 3.5 per cent compared to year-ago quarter, the first such rise in about six years.

It's fair to say IBM sure took its time to regain its footing. And yet the corporation still managed to make a loss, due to a ten-figure tax bill from bringing home profits held overseas, apparently. Today IBM published its financial figures for its fourth quarter of 2017, ended December 31. Here's a summary:

  • Revenues of $22.54bn were up 3.5 per cent from $21.77bn in Q4 2016, beating analyst estimates by $490m. If you adjust for currency rates, revenues were up 1 per cent, which, well, is still greater than zero.
  • Net income was actually a net loss of $1.05bn as IBM swallowed a one-time $5.5bn charge from basically doing an Apple and repatriating overseas profits back to America. That bill also included "the revaluation of deferred tax assets and liabilities," we're told. A year ago the corp banked a $4.5bn profit; if you put the tax charge aside, IBM would have banked $4.45bn, down 1 per cent.
  • Earnings per share (GAAP) were -$1.14 due to the tax hit, but non-GAAP earnings were $5.18, just about topping analyst estimates of $5.17.
  • Strategic Imperatives (a handful of operations IBM sees as key to its business) revenue was $11.1bn, a 17 per cent year-on-year jump, or 14 per cent if you adjust for currency rates.
  • Cloud revenues were $5.5bn, up 30 per cent year over year, or 27 per cent if you take currency effects into account.
  • Cognitive Solutions revenue was $5.4bn, up 3 per cent, or flat if you consider currencies, from the year-ago quarter. This segment includes things like the much-hyped IBM Watson suite of AI-ish software.
  • Systems revenue was $3.3bn, a 32 per cent increase driven by strong System Z and Power Systems sales, or 28 per cent when taking currency effects into account.
  • Global Business Services, the unit undergoing a shakeup, logged revenues of $4.2bn, a 1 per cent increase, or 2 per cent dip when adjusting for currency.
  • Technology Services and Cloud Platforms reported $9.2bn in revenue, down 1 per cent, or down 4 per cent when considering currencies. This comes as Big Blue mulls, ahem, "redeploying" staff within its Global Technology Services arm. IBM refused to talk about changes to its services devisions.

For the full year:

  • Revenues were $79.1bn across IBM, down 1 per cent from FY2016.
  • Net income was $5.8bn including the tax write-down, but otherwise would have been $12.9bn (non-GAAP). As it was, the $5.8bn was a 52 per cent drop from 2016, where the $12.9bn would have been a one per cent decrease.
  • Earnings per share were $6.14 GAAP, down 50 per cent, while non-GAAP EPS was $13.80, a two per cent gain.
  • Strategic Imperatives revenue for the year was $36.5bn, up 11 per cent from a year back.
  • Cognitive Solutions revenue was $18.45bn, up 1 per cent from $18.19bn in 2016.
  • Global Business Services revenue was $16.35bn, down a touch from $16.7bn last year.
  • Technology Services and Cloud revenues were $34.28bn, down 3 per cent from $35.34bn
  • Systems revenue was $8.19bn, up 6 per cent from $7.7bn in 2016

"Our strategic imperatives revenue again grew at a double-digit rate and now represents 46 percent of our total revenue, and we are pleased with our overall revenue growth in the quarter," IBM CEO Ginni Rometty said of Big Blue's first positive growth since 2012.

"During 2017, we strengthened our position as the leading enterprise cloud provider and established IBM as the blockchain leader for business."

Despite the quarterly revenue growth, shares in IBM were down 3.2 per cent in after-hours trading at $163.70 due to concerns over its outlook for 2018 – software is seen as key to Big Blue's future success and yet these sales have a habit of coming and going.

Before the results were announced, and discussed on a conference call with executives, Daniel Chen at analyst house AllianceBernstein warned in a note to investors: "Software represents about 30 per cent of IBM's revenue and an estimated 50-plus per cent of pre-tax income, underscoring its importance to IBM's turnaround.

"Last quarter, IBM saw an acceleration in its software business, with software revenue growing 0.3 per cent organically at constant currency – its first quarter of software growth since Q1 2014. This acceleration was driven by two of its software businesses: transaction processing software, which is largely mainframe software; and operating systems software, which also has a high percentage of mainframe software.

"IBM conceded that the pickup in its software revenues was on the mainframe platform, repeatedly stating that they had a very strong 'transactional' quarter. Our belief is that IBM benefited from software renewals and ELAs [enterprise licensing agreements], which we believe are unlikely to repeat [in the fourth] quarter."

And as it turned out, Watson AI and software sales – beyond operating system revenues – were pretty flat, cooling Wall St's confidence in the IT titan. ®

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