IBM (IBM) Grew Revenue For First Time in Nearly Six Years, But Sellers Take Control
IBM (NYSE: IBM) shares hit a wind pocket Friday, dropping 3.8%, despite posting its first revenue growth in nearly six years as analysts focused on lackluster guidance.
IBM reported four quarter non-GAAP EPS of $5.18, $0.01 better than the analyst estimate of $5.17. Revenue for the quarter rose 4%, or 1% adjusting for currency, to $22.5 billion versus the consensus estimate of $22.05 billion.
IBM forecasted FY 2018 EPS of "at least" $13.80, compared with $13.80 in 2017 and market expectations of $13.92.
The company's Systems segment was the driver for the revenue growth. The segment reported revenue growth of 28% driven by sales of high-end mainframes. Worrying, however, is that this segment only makes up 15% of overall revenue. The other segments, which make up 85% of revenue, all showed flat or declining revenue.
Stifel analyst David Grossman, who is Buy-rated on the stock, highlighted that by service line, software was weaker than expected, services were in line and systems stronger.
While the positive mainframe contribution was expected, Grossman highlighted that Cognitive (software) growth was the outlier. Management attributed the Cognitive weakness to that segment of the category with specific reference to Content Management and Data Integration products and timing of new product releases.
Meanwhile, while services margins were weak, Grossman expects improving growth in services (~65% of revenue) will be a positive catalyst for this stock as the year progresses.
He highlighted the following:
- Current visibility from backlog is 67% of the GBS revenue plan and 75-80% for GTS. Management indicated that both metrics combined with the timing of backlog release, suggest improving revenue growth trends as 2018 progresses.
- GTS (43% of revenue) will anniversary customer losses with easier comparisons in 2H18. GBS (21%) has now reported four consecutive quarters of bookings growth and consulting (45% of GBS mix) has grown for two consecutive quarters reflecting the growing influence of newer services.
- Margins in 2018 should benefit from improving growth (costs largely fixed) as well as mix to newer services.
StreetInsider Premium first published a variation of this article on Jan. 18 at 4:07PM ET. Try StreetInsider Premium for two weeks free here.