IBM Beats Expectations, But Turnaround Is Still Far Away

  • IBM's Q4 results beat analysts’ expectations for EPS and revenues.
  • The company presented impressive growth on its strategic imperatives. However, they did not offset the decrease from other businesses.
  • IBM provided lower 2016 guidance than expected and dismissed any hopes of a turnaround soon.

Tech giant IBM (NYSE:IBM) reported its Q4 2015 earnings on 19th Jan, with higher than expected EPS and revenues figures. However, it issued a disappointing guidance that sent the IBM stock 4% down. In an earlier article outlining focus areas for the IBM earnings release, I mentioned that while most sell-side shops have downgraded IBM, investors are still looking for signs of an upcoming bottom in IBM’s decline.

On the bright side, IBM delivered $22.06B in revenues, which is slightly higher than the street’s consensus for $22.02B in revenues, and an adjusted EPS of $4.84, compared with the $4.81 that was expected. Q4 has been, historically, IBM’s best quarter revenue-wise, and Q4 2015 did not break that trend. However, the disappointing 2016 guidance indicates to investors that this year will be another challenging year for the shareholders.

For some years, IBM had been in a process of fundamental change in its business when it started to ramp up its strategic initiatives, such as cloud and analytics, while trying to maintain the rest of the business. As shown in the recent earnings releases and as the IBM stock performance indicates, IBM had a partial success in running this transition smoothly, and revenues have continued to decline YoY. Even though IBM beat analysts’ expectations in Q4 2015, its top-line reflect an 8.5% decrease YoY, and annual 2015 figures reflect a 12% drop in annual revenues.

The best measure that reflects the great transition that IBM is going through these days is the impact of the impressive growth of the company’s strategic imperatives on the total financial results. In 2015, IBM generated an incredible $28.9B in revenues from its cloud, analytics, mobile, social, and security sectors, which is 26% higher year-over-year. As shown in the chart below, every sub-segment of IBM's strategic imperatives grew significantly in 2015 when analytics and cloud services accounted for the vast majority of the company's revenues. However, other sub-segments, such as security and mobile, which are rapidly growing industries, generated tiny revenues, and many of the acquisition speculations that involve IBM relate to these segments.

IBM_chart 2_012016

Even though this enormous amount of revenue could satisfy most of the pure-play cloud, analytics, social, and security companies, in IBM’s case, it accounts for only 35% of the company’s revenues and cannot offset the other tumbling businesses' losses. IBM is down in almost every segment and in every geography, in both revenues and operating margin, and it will take time for the company to stabilize its financials before changing to an upward trend. Investors looking at an IBM investment with a few years' horizon could find it appealing, and they might even want to wait for an additional significant drop in price. The transition that the company is going through is the correct path, and it touches most of the right enterprise tech segments, but it will take time before the company can grow once more.

IBM provided a guidance of operational EPS of $13.5, compared to a consensus of $15, which reflects the difficulties that IBM is expected to experience in 2016. Looking at the 2015 EPS low tax rates, forex, and sharp spending cuts helped the company maintain its above-expectation EPS. However, I don’t believe that investors should count on these factors when considering an IBM stock position.

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