International Business Machines Corporation (IBM) on Q2 2021 Results - Earnings Call Transcript
Operator: Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Ms. Patricia Murphy with IBM. Ma'am, you may begin. Patricia Murphy: Thank you. This is Patricia Murphy, and I'd like to welcome you to IBM's Second Quarter 2021 Earnings Presentation. I'm here with Arvind Krishna, IBM's Chairman and Chief Executive Officer; and Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. We'll post today's prepared remarks on the IBM investor website within a couple of hours, and a replay will be available by this time tomorrow. Arvind Krishna: Hello, everyone. Thank you for joining us today. It's my pleasure to be speaking with all of you again. We continue to make progress this quarter. Our revenue growth improved to 3% as reported, led by Global Business Services and our Software business and we grew adjusted free cash flow for the first half. Across every industry, enterprises are using technology to redesign business processes, whether it's automation in manufacturing, telemedicine in healthcare or omnichannel in retail. These digital transformations are enabled by a hybrid cloud environment. The technology and services we provide to our clients enable their business growth and productivity increases and improve customer experiences. This is why our strategy is focused on hybrid cloud and AI. At the same time, the overall spend environment continues to improve. With the economy reopening in many parts of the world, many markets and industries are getting back on track. We see this in North America and in select industries. Jim will delve deeper into our performance across the different parts of our business. But I want to be clear upfront that with our results over the last two quarters, we remain on track to achieve our financial expectations for the year, revenue growth at actual rates and $11 billion to $12 billion of adjusted free cash flow. We continue to take decisive steps and make the investments required to execute on our strategy. This includes making acquisitions that strengthen our portfolio, offering new innovations and digital capabilities to our clients, expanding our partner ecosystem, accelerating changes to our go-to-market model, while also instilling more of a growth mindset among our teams and building a more client-centric culture. We are executing the separation of Kyndryl, which is still on track to be completed by the end of the year. Jim Kavanaugh: Thanks, Arvind. As always, I'll start with the financial highlights and then comment on our revenue performance, business model dynamics, and cash and liquidity position, before getting into the segments. In the second quarter, we grew revenue over 3% as reported to $18.7 billion. We expanded our operating gross profit margin and grew gross profit dollars 4%. We reported operating earnings per share of $2.33. Our adjusted free cash flow was $3.8 billion through the first half, and we generated $11 billion over the last year. And our balance sheet and liquidity position remain strong. We continued to make progress in our revenue performance, led by 7% growth in Global Business Services and 2% growth in software, both at constant currency. As Arvind mentioned, the spending environment is improving. We see this in markets where reopening is progressing, like the US and Canada, and in several countries in Western Europe. From an industry standpoint, we saw a meaningful improvement in some of the areas that had been more impacted by the pandemic like travel and transportation, automotive and industrial products. Globally, we are helping enterprises digitally transform, leveraging our platform approach. IBM's cloud revenue over the last year across software, services and infrastructure is now $27 billion, which is up at a double-digit rate. This continues to be led by Global Business Services and Cloud and Cognitive Software, whose cloud revenue this quarter was up 30% and 25% respectively. As our revenue performance improves, the fundamentals of our business model remain solid. We expanded operating margins, with gross margin up 30 basis points and pre-tax margin up 70 basis points. We have taken actions to streamline and simplify our operating model. As I've said in the past, roughly one-third of the structural actions are to improve Global Technology Services' profit profile ahead of the separation of Kyndryl. We are realizing these savings, and our GTS gross and pre-tax margins are up this quarter. The other roughly two-thirds of the targeted actions address stranded costs from the separation and create financial flexibility which we are investing for future growth. We are ramping investments in skills, innovation and in our ecosystem. Patricia Murphy: Thank you, Jim. Before we begin the Q&A, I'd like to mention a couple of items. First, we have included supplemental information at the end of the presentation. And finally, as always, I'd ask you to refrain from multi-part questions. So operator, let's please open it up for questions. Operator: Thank you. At this time, we'll begin the question-and-answer session of the conference. Our first question comes from Katy Huberty with Morgan Stanley. Your line is open. Katy Huberty: Thank you. Good afternoon. Question I guess for Jim, Cloud and Cognitive Software as well as GBS PTI margins are down year-on-year. I imagine a lot of that is coming from the investments that you walk through. But can you talk about any other factors like mix that are playing into the margin performance in those groups? And also are you seeing any impact from labor shortages and wage increases, particularly in the services business? Thanks. Jim Kavanaugh: Sure, Katy. Thank you very much for the question. Obviously, those two very important segments that you chose GBS and Software are two of our growth vectors within our business model. As we've said, entering the year, we guided both on revenue and on cash flow and we said that we were going to continue to invest significantly within those growth vectors as we move forward. And I see -- and I think what you see playing out here in the second quarter, is that investments starting to ramp up from the first quarter into the second quarter going forward. We are investing in front of demand because of what we said in the pre-remarks is that we see an encouraging macro and demand profile playing out and you see that with the strong acceleration in our software base of business quarter-to-quarter and in our GBS base of business. GBS, by the way, exceeded our expectations and actually got back to pre-pandemic revenue levels overall. But just to really bring it home: one, we're investing; two, we have high margins in our software base of business already, and the dynamics between Red Hat and the deferred revenue dissipating as we move through the year is really what you see play out in the second quarter overall. We feel very comfortable at the margin level in software. We're going to continue to invest in innovation ecosystem and skills and we feel very good about our GBS business overall. Labor pressures, yes, there is a war for talent going on. We are investing significantly, we're bringing thousands and thousands of GBS practitioners in through the first half and we feel pretty good about what the profile of that business is going forward. Patricia Murphy: Thanks, Katy. Sheila, can we take the next question please? Operator: Our next question will come from Wamsi Mohan with Bank of America. You may proceed. Wamsi Mohan: Yes, thank you. It's nice to see the growth in gross profit dollars two quarters in a row. You had very strong consulting growth and GBS growth as Jim just alluded, but gross margins comprised 60 basis points year-on-year in GBS. It would be a nice to see the full leverage in the model come through with both revenue growth and margin expansion to amplify the gross profit dollar growth. So my question is really, how much longer would you need to be in investment mode in GBS? And is it possible that we see in the coming quarters or years? When do we actually see both revenue growth and margin expansion come into the model in GBS? Thank you. Jim Kavanaugh: Wamsi, thanks for the question. So just building on Katy's question upfront. We are and will continue to invest in this business as GBS is an essential part of our hybrid cloud platform-centric strategy. It is both the tip of the spear, if you want to call it, in driving the demand from an architectural point of view to our platform that then creates that flywheel effect that we talked about for every dollar that we land on the platform, we get $3 to $5 a software and $6 to $8 of services revenue. So we're going to invest significantly. Now with that said, we rebounded off of second quarter. Second quarter last year when the pandemic hit, we dropped 7 points quarter-to-quarter. We posted down 6 last year in GBS. We returned back to pre-pandemic revenue levels and exceeded growth expectations. But we're going to continue to invest in this part because of the importance GBS place at hybrid cloud platform and we'll get that profit dollar contribution and more importantly, you see it play out in our second key metric that we give guidance on and that's our adjusted free cash flow. And we feel very good about where our adjusted free cash flow is through the first half. It's up year-to-year really taken into account most of the cash tax headwind we talked about 90 days ago is pretty much behind us going forward. So our attainment wise on adjusted free cash flow, which is really going to be a reflection of both top line revenue acceleration and operating leverage and margin as we move forward. Patricia Murphy: Thanks, Wamsi. Can we go to the next question, please? Operator: Our next question comes from Toni Sacconaghi with Bernstein. Your line is open. Toni Sacconaghi: Yes, thank you. I was wondering if I could ask you a little bit about acquisitions. I think over the last year, you spent $3.2 billion on acquisitions. And Arvind, you've said that you expect acquisitions on a sustained basis to contribute about 100 basis points to 150 basis points of inorganic growth per year. So, is that what we should be thinking about, about $3 billion in acquisition spend, generating $600 million to $900 million, that's 100 basis points to 150 basis points of RemainCo? Is that sort of the mental model framework we should think about? And then could you comment specifically on how much acquisitions impacted GBS' reported growth rate and Cognitive apps reported growth rate in the quarter? Or just give us a dollar figure for the inorganic acquisition contribution to each of those businesses please? Thank you. Arvind Krishna: Thanks, Toni. Great question. So let's just start with the first part. So we are generating -- last year, if I remember correctly, $10.8 billion of free cash flow for the year 2020. We have said $11 billion to $12 billion this year. So if you do the math between dividends, acquisitions, and capital expenditures, you get to the $3 billion to $3.5 billion. If you now say that we are going to increase our free cash flow by $0.5 billion to $1 billion in a given year and you can expect that number on inorganic activities to go up year-over-year. So the $3 billion to $3.5 billion is a fair number for this year. It would -- it could go up as we begin to increase our cash flow. We have already said, next year we expect to generate $12 billion to $13 billion, not $11 billion to $12 billion. So that gives you one sense Toni, just on the absolute number. The second question you had in there on the GBS. So as we have said and offset before 100 basis points to 150 basis points of growth from acquisitions, I would say that GBS is right in the top end of that number. If you look at the second quarter and if you look at Cognitive applications actually more product Cognitive Software, all in, because I think Cognitive applications there was a net, if any, from acquisitions, the number would be at the very, very low number, I mean, maybe a few tens of basis points, nothing significant yet. Now, the GBS acquisitions give you an immediate return and then grow at a nice number, but obviously contributing a lot less there. Think of it in the software side, the model is they come in, they do because the deferred revenue begin to give you some acquisition, but over - revenue over 12 months. But those acquisitions grow very fast. So the contribution actually goes on for multiple years not just for a single year from those acquisitions to the overall growth rate. And so that's the slight difference. GBS immediately, about 150. Software, much smaller few tens. But imagine that all of those build up over time, that it provides a pretty nice tailwind then over two years to three years. Patricia Murphy: Thanks for the question, Toni. Let's go to the next question please. Operator: Our next question will come from Amit Daryanani with Evercore. Your line is open. Amit Daryanani: Thanks for taking my question. Good afternoon, everyone. Arvind, I have a question on the hybrid cloud potential. You've talked a fair bit about it today and in the past and I think most investments really agree that hybrid cloud is the reality, but maybe you could touch on. a, why do you think IBM is better positioned to enable your customers to get there versus some of your peers? And then secondly, what does hybrid cloud mean for your profitability and free cash flow? Because I think to some extent there is a perception perhaps misperception that the shift from on-prem to hybrid is negative for IBM's margins. Arvind Krishna: Hi Amit, thanks. So as you correctly have pointed out, I mean I wouldn't repeat you, but I obviously believe it, hybrid cloud is the reality for our clients. Now to get into the more meaty parts of your question. If you look at -- why would people prefer us for hybrid cloud? If I look at a given large hyperscaler, they'll do hybrid as in their own public cloud and maybe some on-premise means. The goal is to drive workload onto the public cloud. Who has the credibility to go across multiple public clouds, and that's why you hear me always say both Microsoft and Amazon are our partners, not only our competitors and that is an important play that IBM has done for many, many decades where we integrate across environments that our clients operate in. So that's one part. On a bit more of a technical level that was the primary reason for the Red Hat acquisition. Red Hat give us both the platform and the assets to be able to bring a hybrid cloud platform to bear, because we would all agree, I think all of your listeners and all of your audience would agree that Linux was the de facto operating system. Red Hat Linux is the de facto for on-premise and private environment, containers is the standard which people are going to move on to. So, if you see we begin really strong on-premise and private you can take that same exact environment to multiple public that gives us, we believe an advantage. Now let me acknowledge to the point you're making if hybrid cloud is the reality then everyone is going to start having a play in hybrid, but we believe that our play is advantage for the industries that we serve. That doesn't mean they will use us exclusively, but they will use us to a large extent and that is where we are headed there. The second part, now for your question, which I think actually plays right in on profitability and cash flow. The way we look at it, over two-thirds of where we get our revenue is going to lie in software. If that is the case and software comes at software margins, I'm not going to debate whether you get a difference in model from on-premise licensing to as a service-licensing, to term license model, all of those even out and pretty much on a wash over two year to three years. They are a difference in any given six months, but if I take a two year to three year view and that is what we really fixed on driving then all of that evens out and you begin to get gross margins back up in the 70s and 80s, and you begin to get the profitability and cash flow associated with that. And so that is the answer to that question. By the way the service is based on helping our clients go there. You can begin to see that, and I know that there were a couple of questions earlier on the GBS margin. Look we are very fixed on driving investments. So we drive investment, a little bit ahead, I'm not going to tell you years ahead, but maybe one or two quarters ahead of the revenue, while the revenue growth comes, we'll keep doing that and that will impact maybe percentages, but by 10s of basis points, but it shows up in absolute profit and absolute cash flow even in that part of the business. Jim Kavanaugh: Yes, I would just add one thing to that Arvind to build on your point. When you look at the IBM company post separation of Kyndryl. The IBM company is going to be roughly around 45% to 50% software as far as composition of mix. That carries with it a high EBITDA profile already today. And just as one example, when you look at our Red Hat base of business today as CFO, I love that. That subscription model that has growth in ARR built into it overall. It's already running well north of the Rule of 40 today. So as we shift more and more to software based contribution that mix effect will help us bottom line in cash also. Patricia Murphy: Thank you, Amit. Sheila, let's take the next question. Operator: Next, we will hear from Matt Cabral with Credit Suisse. You may proceed. Matt Cabral: Yes, thank you. Within Cloud and Cognitive, I was hoping to dig a little bit more into Cloud Paks, and wondering if you could talk about just more broadly the maturity of the Cloud Paks portfolio and where you are in the integration with OpenShift. Can you just talk about where you're seeing the impact in terms of customer adoption so far? And going forward, the contribution from Cloud Paks on the financial performance of the software segment from here? Arvind Krishna: Yes. Matt, thanks for the question. Let me answer the first part of your question on the, I'll call it the architectural elements and the use cases. And then I'll give it to Jim to answer it on the financials listing. So, if you look at the maturity of Cloud Paks, I would tell you that every Cloud Paks we have been selling this year and deploying this year is on OpenShift. We made the move from other Kubernetes platforms onto OpenShift way starting in October of '19. And so yes, of course, let's acknowledge that people might have purchased prior to 2019 would have bought other Kubernetes platforms. And so by last year, 2020, it was all going onto OpenShift. I think that maturity is complete. Now if some people have prior version of the software deployed we observe typically within three years from day one, they do move to the new versions. So I would expect by the end of this year, even the prior deployed would have fully moved and that's done. If you look at customer adoption, Cloud Paks are a very strong contributor to the 3200 clients that we mentioned. Well over half of them come through Cloud Paks. And so what are the use cases. Look, the work we're doing with Palantir is a great example. Palantir runs on top of the Cloud Paks for data. That's a great example of what we're doing. When you hear us talk about Watson Assistant has in the CVS use case, which handled over 10 million calls in a quarter for COVID-19 vaccines that Watson Assistant runs on top of another Cloud Pak. So these are great examples of how mature the technology is. I would tell you the OpenShift maturity is complete and it really helps reinforce both adoption of OpenShift as well as then clients get very comfortable with deploying OpenShift for other use cases. It's a workload at the end of the day for OpenShift and as clients get comfortable, we might deploy it for other purposes as well. In terms of the financials, I'll pass it to Jim. Jim Kavanaugh: Yes, just quickly Matt, thank you very much for the question. Taking a step back, first of all, we're very pleased with our overall progression within our software portfolio. More work to do, but we're making progress. And C&DP, which I'll remind everyone on the call and our investors is about 50% of our overall software portfolio and that's where the lion's share of our Cloud Paks sit. Now when you look at our C&DP performance, when we look at it on the way we manage the business on a historical normalized basis, we see acceleration. We return back to growth in first quarter, we accelerated that growth to 4% here in the second quarter. And that is really attributed to the nice momentum we're seeing in Cloud Paks. We announced Cloud Paks 18 months ago, two years ago, given our ELA historical client base that takes time to churn through that client base. And as you know, last year was the trough of our ELA renewal cycle. We start to improve on that later in the second half and really that ELA cycle plays out in 2022, but we actually had a very nice inflection here in the second quarter. Our Cloud Paks on NRR, net revenue renewal were north of 100%. So, we've said all along Arvind and myself that there is going to be shift to Cloud Paks and there's going to be lift with Cloud Paks. And now we're starting to see a higher mix contribution of Cloud Paks and we're starting to see where we do have shift we're getting north of 100% on NRR perspective and that's an encouraging trend. Patricia Murphy: Thank you, Matt. Let's go to the next question, please. Operator: Our next question comes from Tien-Tsin Huang with J.P. Morgan. Your line is open. Tien-Tsin Huang: Hey, thanks. Good talk to you all. Just on the -- on the services side, consulting obviously great double-digit, you had signings were pretty strong here. Do you feel like from a backlog and pipeline perspective that you are starting to reach a little bit infection to get some better growth overall out of the services unit given what you see plus some of the investments that you're making? And then separately, forgive the follow-on question Patricia, but just on the TPP front, transaction processing platforms is it just a comps issue that we should look for that. The performance there to get better or are there other areas that we could be potentially monitoring to see some better performance there. Was it just waiting for that transition? Thanks. Jim Kavanaugh: I'll take that, Arvind. Tien-Tsin, thank you very much for the question. When you look at our services base of business, we delivered $9.2 billion of signings in the quarter, it's up double digit at actual rate. We did see improvement in our backlog overall. It's really very different dynamics playing out here as we tried to say in the prepared remarks. We see very strong momentum in our GBS space of business. When you look at our signings in the quarter, we had strong performance, our trailing 12 months book-to-bill is 1.2. Through the first half, we have roughly double-digit growth in signings across all three sub-segments. Very good growth this quarter in large deals and we have continued momentum in small deals and we saw improvement in our revenue, in our backlog, and our revenue realization moving forward and that gives us comfort. As we said in the prepared remarks, we expect about a normal quarter to quarter seasonality overall. We actually see GBS accelerating growth probably out another point from the -- from the second quarter overall. In GTS, really what we're seeing is a good performance overall. Leveraging our incumbency position and driving strong renewals. We're seeing with that incumbency position finally a turnaround with an encouraging trend on client base business volumes and project-based services that they are engaging in project-based services and our incumbency accounts were up 20% here in the second quarter, but as expected the new logos. While we have a very healthy pipeline in new logos out there, the sales cycles are elongated as we said in the prepared remarks. So we see some nice acceleration continuing in GBS overall, but again with GTS, it's a focus on the fundamentals of the business profile that means margin profit and cash and I think you've seen in the second quarter, we made some very good progress overall with margins up 110 basis points, pretax margins up 190 basis points and profit dollar growth, both in gross profit dollars and a pretax profit dollars. Lastly on TPP. Yes, as we talked about many times over the last year or so. We do see the transition happening in this portfolio with regards to a shift back more and more to consumption base, annuity base, purchasing versus in 2018 and 2019 we had a much healthier macroeconomic environment, a very catch --cash-rich environment, clients then shifted to more perpetual licenses. We're seeing that come back and that's going to play as it played out where we saw the revenue upside in '18 and '19. In '20 and '21, you're going to continue to see the headwind as we've been saying. We expect that to come back in 2022 back to normal market trend growth rates overall. Patricia Murphy: Thanks, Tien-Tsin. Let's go to the next question, Sheila. Operator: Our next question will come from David Grossman with Stifel. Your line is open. David Grossman: Thank you. Actually most of my questions have been answered. I just have one follow-up question. I think Jim you mentioned, revenue retention of greater than 100% and I wasn't quite sure what the reference point was in software and whether you have any incremental data points you can share about revenue retention by business unit within the Cognitive segment? Jim Kavanaugh: Sure, David. Thank you very much. Cloud Paks are definitely an essential part as we've invested significantly to containerize our software and optimize it on top of OpenShift our hybrid cloud platform overall. When we take a look at our Cloud Paks, we measure and manage, Arvind and I have a dashboard that we look at all of our large enterprise top clients overall, our deployment penetration within each of those clients and we're able to see as we transition a client from a traditional middleware to a cloud-based containerized solution, not only can we track the deployment and how that progresses over time we can see the dollar of yesterday versus the dollar of today as they transition to Cloud Paks and we measure the net revenue retention. Not only how much come in whether we are able to upsell, cross-sell with multiple Cloud Paks as we move forward. And like I said in the second quarter we're making progress, much more to do, but we're making progress on the mix composition of moving more and more to Cloud Paks and we're also making progress on capturing more of our clients' wallet share dollar for that same dollar of traditional middleware overall. Hopefully, that helps David. Arvind Krishna: Jim, to make it into business terms or a use case, what that tells you is that when they renew, they are actually buying more volume, which means it's a beginning to become a larger part of the real estate, technology real estate at a client. Patricia Murphy: Very good. Thank you, David. You know, we're at the top of the hour, but let's take one more question, Sheila. Operator: Thank you. Our last question will come from Keith Bachman with Bank of Montreal. Your line is open. Keith Bachman: Hi, many thanks team. I wanted to ask Arvind, you a question on revisiting on what your growth assumptions or targets are around Cognitive. And the particular reference point to my question this quarter you generated roughly 2% revenue growth and it was -- you had the benefit of compare particularly on some of the line items within Cognitive and so not particularly -- it's good growth, but still a ways to go to reach our longer-term target. So what happens to change that improves Cognitive and Part B the backdrop is if I think about Red Hat and we remain pretty positive on Red Hat even over the next couple of years, but you still face the uphill battle of the longer-term trends within Cognitive Db2 is probably declining market as you've talked about in the past transaction processing platforms is also a declining I think revenue stream over the arc of time. So if you could just revisit on how do you reach your longer term growth rates within Cognitive? Thank you. Arvind Krishna: Right. Thanks, Keith, important question, and important element of our pieces going forward. So we've been clear that our Cloud and Cognitive software will grow mid-single-digit going forward. And you are questioning Keith, how is that going to be possible? So first and most important element Red Hat today is sitting at about in rough numbers 25% of the business, growing at about 17% this quarter, let's call it 15% in the medium term. But as opposed to being 25% is going to go up and up to become 35% of the total and over a longer term even more. So 15% for one-third of the business you kind of get the contribution from that, which is quite significant. Also, as we are both innovating organically example in Cloud Paks and we are acquiring businesses that are going to turbocharge, bit of a pun on Turbonomic, our business there on both management as well as on cyber-security, we expect to see very high growth rates there. High-single digit that is well above the mid-maybe into the low-double digits. Will we see declines in some parts of the portfolio? We have been very transparent. We expect DPP to be between mid and high single-digit decline in the mid to long term, but it becomes a smaller and smaller portion of the total. So it has -- it has a drag from there. Cognitive applications; we expect to be right in there, but it's the smallest part of the portfolio, it's not the biggest part of the portfolio. And so just a recap on that number one, Red Hat growing in the mid-teens as it becomes bigger -- a bigger absolute contributor to the total. The rest of the cloud and data platform with a mixture of both organic innovation and inorganic acquisitions is going to then contribute to growth at or above the mid-single digits in the medium term. DPP mid-single-digit decline , probably right in line with the model. So hopefully Keith that gives you a breakdown into a lot of pieces. By the way the DB2 that you mentioned declining is very much inside the DPP . So those are not really different questions. Dp2 mainframe and DPP are one and the same. So, let me just make a couple of comments to wrap up the call. We again made progress in this quarter, but we acknowledge we still have more to do. As you move into the second half, we are continuing to invest and execute on our actions, which includes the separation of Kyndryl. All of this positions IBM to exit the year in a strong position on a path to sustainable growth and I look forward to continuing the dialog with you. Patricia Murphy: Great. Sheila, can I turn it back to you to close out the call? Operator: Absolutely, thank you. Thank you for participating on today's call. The conference has now ended. You may disconnect at this time.IBM Ratings Summary
IBM Quant Ranking
Related Analysis
IBM’s Buy Rating Maintained at BofA
BofA Securities analysts reaffirmed their Buy rating and a $209 price target for IBM (NYSE:IBM) stock. The analysts attended IBM's Think 2024 event in Boston, where the company announced the release of its Granite model family into open source. The analysts noted that while large language models (LLMs) can be costly to train and operate, IBM is adopting a more pragmatic approach with smaller, more enterprise-friendly models, particularly for inferencing.
BofA reiterated the Buy rating, highlighting IBM's ongoing turnaround, revenue growth, and free cash flow improvements. They also emphasized IBM's defensive portfolio, attractive dividend yield, and underappreciated AI portfolio, which has a cumulative business value exceeding $1 billion.
BMO Capital Sees Steady Upside For IBM
BMO Capital analysts maintained their Market Perform rating and a $210 price target for IBM (NYSE:IBM), suggesting that for both IBM Consulting and Software segments, the current and consensus estimates for 2024 are achievable but unlikely to exceed expectations, with detailed analysis provided within their report.
Additionally, the sum of the parts valuation approach was applied, indicating that IBM's present valuation multiple is fair. Although IBM's operational performance and outlook have shown improvement compared to its past performance, the analyst sees limited potential for stock price appreciation from its current levels.
IBM Stock Jumps 9% on Strong Q4 Results
IBM's (NYSE:IBM) shares saw a significant rise of over 9% on Thursday following the announcement of its Q4 earnings, which exceeded analysts' expectations for both earnings per share (EPS) and revenue.
The technology and consulting giant reported a Q4 EPS of $3.87, surpassing the Street estimate of $3.77. Its revenue for the quarter was reported at $17.38 billion, exceeding the analysts' prediction of $17.23 billion.
Breaking down the revenue, IBM's software segment contributed $7.51 billion, a 3.1% increase year-over-year, but slightly below Wall Street's expectations of $7.69 billion. The consulting segment brought in $5.05 billion, marking a 5.8% rise from the previous year and narrowly missing the expected $5.11 billion.
The company's infrastructure revenue was notably strong at $4.6 billion, a 2.7% year-over-year increase and higher than the anticipated $4.35 billion.
IBM forecasts a free cash flow of $12 billion for the entire fiscal year, which is higher than the analyst estimate of $10.92 billion. Furthermore, IBM anticipates its revenue to grow by approximately 4-6% in 2024, surpassing the Wall Street projection of about 3%.
IBM Started With Hold Rating at Jefferies
Jefferies analysts initiated coverage of IBM (NYSE:IBM) with a Hold rating and a price target of $180 per share. In their note issued on Friday, the analysts acknowledged IBM's progress in software but see no major breakout potential.
The analysts pointed out their appreciation for IBM's strategic shifts to reorient itself towards a software-centric model. This transformation includes significant steps like the acquisition of Red Hat, the spinoff of Kyndryl, and investments in AI and software go-to-market strategies. Furthermore, Jefferies views IBM as an "under-the-radar AI player," with greater potential in consulting than in software.
The analysts highlighted IBM's Watsonx platform, which provides substantial exposure to general AI workloads. However, Jefferies sees a more immediate AI opportunity in IBM's strategic consulting division. This is because most clients are still in the early stages of implementing general AI strategies and require guidance on effectively utilizing these technologies.
Despite these positive aspects, Jefferies noted that IBM's revenue growth is trailing behind its software industry peers, and it operates with lower margins. The analysts suggest that while IBM's stock might see incremental gains, significant upside is limited unless there's a considerable acceleration in its software segment.
IBM Shares Gain 5% Following Q3 Results
Shares of International Business Machines (NYSE:IBM) increased by nearly 5% yesterday after the company beat Q3 profit expectations and maintained its guidance.
IBM posted an adjusted EPS of $2.20 on revenue of $14.75 billion, slightly surpassing analyst predictions of $2.12 EPS on $14.73 billion revenue. Software revenue, encompassing its AI platform, grew 8%, consulting revenue went up by 6%, while infrastructure revenue declined by 2%.
The tech giant confirmed its projected 3-5% revenue growth on a constant currency basis and maintained its 2023 free cash flow forecast of around $10.5 billion.
IBM Shares Gain 5% Following Q3 Results
Shares of International Business Machines (NYSE:IBM) increased by nearly 5% yesterday after the company beat Q3 profit expectations and maintained its guidance.
IBM posted an adjusted EPS of $2.20 on revenue of $14.75 billion, slightly surpassing analyst predictions of $2.12 EPS on $14.73 billion revenue. Software revenue, encompassing its AI platform, grew 8%, consulting revenue went up by 6%, while infrastructure revenue declined by 2%.
The tech giant confirmed its projected 3-5% revenue growth on a constant currency basis and maintained its 2023 free cash flow forecast of around $10.5 billion.
IBM Stock Gains 3% Following Q2 Earnings Report
IBM (NYSE:IBM) shares rose more than 3% intra-day today after the company reported its Q2 earnings results, with EPS of $2.18 coming in better than the Street estimate of $2.02. However, revenue of $15.5 billion came in worse than the consensus estimate of $15.58 billion.
The company provided its fiscal 2023 outlook, expecting revenues to grow in the range of 3-5%.
BofA Securities analysts reaffirmed their Buy rating on IBM and raised their price target to $160.00 from $152.00, stating that they believe the positive momentum in IBM's business, including revenue growth and improvement in free cash flow, will persist. The analysts highlighted that IBM possesses a defensive portfolio, an appealing dividend yield, and an AI portfolio that is not fully recognized or valued by the market.
