Source: The Wall Street Journal
A $5.5 billion charge related to the new U.S. tax law pushes fourth-quarter results into the red
International Business Machines Corp. reported higher revenue for the first time in 23 quarters and signaled continued growth into 2018, giving Chief Executive Ginni Rometty breathing space as she tries to turn around the century-old tech giant.
Fourth-quarter revenue rose 3.6% to $22.54 billion. The last time IBM had revenue growth from the prior year was the first quarter of 2012, Ms. Rometty’s first as chief.
Several factors drove growth in the latest quarter: sales of industrial-strength computers—which the company typically refreshes every few years— rose 32% to $3.33 billion, while cloud-computing revenue climbed 30% to $5.5 billion. Also, currency exchange rates have been working in IBM’s favor lately, accounting for 3 percentage points of the quarter’s revenue growth after years of being a headwind.
IBM said it took a $5.5 billion charge related to the new U.S. tax law, helping to push it into the red for the period. Its tax rate, excluding the charge but including certain one-time benefits, was 6%.
In all, the company reported a fourth-quarter loss of $1.05 billion, or $1.14 a share, compared with profit of $4.5 billion, or $4.72 a share, a year earlier.
The loss stemmed partly from a deep erosion in profits in IBM’s services business, showing IBM still has work to do. Pretax profit margins in the two services segments that manage large companies’ software and hardware needs sank 35% and 23%, respectively, from a year ago. In its conference call with analysts, IBM described high investments and “large contract dynamics” in those businesses.
Since becoming CEO, Ms. Rometty has struggled to shift IBM from older, shrinking businesses, such as selling and maintaining equipment in customers’ own facilities, to newer ones that promise rapid growth.
She has staked out a position in helping large corporate customers integrate their traditional operations with cloud computing, and has focused on buzzy areas such as artificial intelligence and the Internet-based ledger technology known as blockchain.
But growth has been elusive, as even high-profile initiatives—such as IBM’s Watson AI, a collection of cloud tools as well as apps for industries including medicine and finance—haven’t delivered a clear financial boost.
Even some of Ms. Rometty’s biggest fans have lost patience. IBM’s largest and arguably most prominent stakeholder—Warren Buffett’s Berkshire Hathaway Inc., which invested more than $10 billion for a 5.4% stake in 2011—sold more than half its holdings last year. Berkshire held about 37 million shares as of Sept. 30.
Shares of the 106-year-old tech company dropped 3.1% in after-hours trading after finishing Thursday’s regular session with a marginal gain at $169.12. The price stands roughly where it did a year ago, while the S&P 500 index has risen more than 23%.
While achieving quarterly growth is noteworthy, IBM is working toward what it sees as a more significant milestone: getting more than half its revenue from so-called strategic imperatives — mostly newer technologies such as AI that customers can access in the cloud.
Revenue from strategic imperatives made up 49% of the total in the quarter, edging toward the point at which sales of the higher-growth offerings will outweigh the rest of IBM, heralding faster growth overall.
In an interview, James Kavanaugh, IBM’s new finance chief, said the company is “ahead of track” in working toward its goal of hitting an annual revenue rate of $40 billion for strategic imperatives by the end of this year.
“That gives us the confidence to say we’re going to grow revenue overall in 2018,” he said.
Jim Lebenthal, a portfolio manager at HPM Partners LLC, said there is evidence of Ms. Rometty’s progress. He shed IBM in 2015 after “a lot of disappointments” but recently added the company to his stable of 20 stocks. He is betting IBM’s newfound revenue growth is sustainable and that strategic imperatives will grow to more than 50% of sales in 2018.
When Ms. Rometty took the CEO reins from Samuel Palmisano in January 2012, revenue started slipping almost immediately and the threat of cloud computing to IBM’s traditional businesses became evident. Ms. Rometty purchased cloud-computing platform SoftLayer Technologies Inc. the following year and committed to developing Watson into a flagship offering.
By 2014, it was clear IBM had diverged from Mr. Palmisano’s financial road map for $20-a-share in profit by 2015. Ms. Rometty set aside that goal, reorganized the company around her strategic imperatives and redirected about $4 billion away from stock repurchases toward priorities such as Watson and the cloud, according to UBS AG analyst Steven Milunovich.
IBM’s challenges now include holding on to its large customers as cloud leaders such as Amazon.com Inc., Microsoft Corp. and Alphabet Inc.’s Google beckon.
“Strategic imperative revenue may cross over the core franchises later this year,” Mr. Milunovich said, “but there are a lot of industry trends working against a large incumbent like IBM.”
Hardware revenue rose 32%, driven by sales of mainframe computers—on IBM’s conference call with analysts, former finance chief Martin Schroeter called mainframes “an enduring and growing franchise”—which accounted for nearly 15% of total revenue in the quarter.
Those sales are critical, as they drive related sales of support services, software, storage and financing that historically have made up roughly 40% of IBM’s operating profit, according to analyst Toni Sacconaghi of Bernstein Research. They also can cement long-term customer relationships that drive recurring revenue such as software subscriptions, he said.
On an adjusted basis, which omits such items as acquisition- and retirement-related charges, IBM had profit of $5.18 a share, a penny more than the $5.17 expected by analysts, according to Thomson Reuters.
The Armonk, N.Y., company’s guidance for 2018 called for operating earnings of $13.80 a share and free cash flow of about $12 billion.