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International Business Machines : IBM's Profit Off 13% Despite AI -- WSJ

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04/19/2017 | 06:57am CEST

Revenue drops for 20th consecutive quarter despite gains from cloud services, Watson

By Ted Greenwald 

International Business Machines Corp. on Tuesday reported a 13% drop in quarterly earnings and narrower profit margins across its business units, including divisions that manage the cloud computing and Watson artificial intelligence operations that the technology giant is banking on to transform its business.

IBM's revenue in the first three months of the year fell from the same period a year ago for the 20th consecutive quarter, with cognitive solutions the only one of its five major divisions to report improving its standing marginally from a year ago.

The Armonk, N.Y., company's shares fell 4.1% in after-hours trading. Shares closed Tuesday down 0.6% in regular trading to $170.05.

Martin Schroeter, IBM's chief financial officer, attributed the net profit decline to a one-time tax benefit that had lifted prior-year results. Pre-tax income rose 38% in the first quarter to $1.4 billion.

However, a silver lining for IBM -- revenue from the faster-growing, higher-margin businesses it calls "strategic imperatives" -- rose 12% from a year ago to $7.8 billion.

IBM's legacy businesses selling hardware, software, and services for traditional corporate computing facilities have been shrinking as customers embrace cloud computing and big-data analytics. The company has been building new revenue streams in its strategic-imperatives businesses including cloud computing, artificial intelligence, security, and mobile technology.

For instance, its Watson artificial intelligence platform offers software designed to understand and act on dynamics of specific industries, such as health care and finance, as well as commands and functions that software developers can use to stitch artificial intelligence into their programs.

Revenue from the strategic-imperatives businesses is spread out among several units. For instance, cloud revenue, which IBM said was $14.6 billion over the past 12 months, comes from all divisions, not just the Technology Services & Cloud Platforms unit that oversees cloud operations.

IBM executives lately have put increasing emphasis on so-called public cloud computing services, which are shared among customers rather than confined to a customer's own facilities, alongside the private and hybrid cloud services that it has emphasized in recent years. While cloud competitors Amazon.com Inc.'s Amazon Web Services and Microsoft Corp.'s Azure pursue the providing of commodity computing infrastructure services, IBM is aiming for a higher-margin business that ties together its strategic imperatives for industries such as cybersecurity, finance, and health care.

This approach has been slow to bear fruit, but it may prove to be a significant advantage, according to some analysts. Major cloud competitors "don't have professional services businesses, so it's difficult for them to deliver a specific solution to a business problem, " said analyst David Grossman of Stifel Financial Corp. "For IBM, that's their legacy."

IBM recently expanded the reach of its cloud business into China, in March signing an agreement with Beijing-based service provider Wanda Internet Technology Group to form a new company, Wanda Cloud Company, based on IBM's cloud platform.

For the first quarter, IBM reported net income of $1.8 billion on $18.2 billion. It reported diluted earnings per share, excluding certain items, of $2.38, up from $2.35 in the comparable 2016 period. Analysts had expected adjusted earnings per share of $2.35 on $18.4 billion in revenue, according to a survey by Thomson Reuters.

For the year, Big Blue reiterated its adjusted earnings-per-share forecast of at least $13.80 and called for earnings of $11.95 based on generally accepted accounting principles.

Write to Ted Greenwald at [email protected]

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Financials ($)
Sales 2017 78 269 M
EBIT 2017 14 367 M
Net income 2017 11 340 M
Debt 2017 33 615 M
Yield 2017 3,61%
P/E ratio 2017 13,50
P/E ratio 2018 12,80
EV / Sales 2017 2,36x
EV / Sales 2018 2,38x
Capitalization 151 272 M
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International Business Mac Technical Analysis Chart | IBM | US4592001014 | 4-Traders
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Mean consensus HOLD
Number of Analysts 26
Average target price 166 $
Spread / Average Target 3,4%
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Virginia M. Rometty Chairman, President & Chief Executive Officer
James J. Kavanaugh Senior Vice President-Transformation & Operations
Martin J. Schroeter Chief Financial Officer & Senior Vice President
Martin Jetter SVP-Global Technology Services
Sidney Taurel Independent Director
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