Wednesday, July 19, 2017

IBM Continues To Promise A Rosy Future While Reporting A Stagnant Present

Bulk of new mainframe revenues coming in fourth quarter, again disappointing investors.


By Therese Poletti
MarketWatch
July 19, 2017

IBM Corp., on the heels of its 21st consecutive quarter of declining revenue, is once again looking to the future for better news.

IBM has been making big investments in cognitive computing, artificial intelligence and cloud computing over the past few years, while talking boldly about how important its Watson AI platform is to its future. Yet a long-awaited revival in revenue from these “strategic imperatives” continues to be just around the corner.

On Tuesday, the tech giant beat earnings expectations, but only because results were buoyed by a tax gain of 18 cents per share. IBM’s IBM, +0.65% overall revenue fell 5% to $19.3 billion, below analysts’ average expectations, though IBM predictably pointed to growth in its “strategic imperatives,” which grew 11%, including growth in cloud computing, and made up 43% of IBM’s total revenue of $19.3 billion in the second quarter.

The next addition to IBM’s list of hopes for the future is a blast from the past, the mainframe. On Monday, IBM launched a next-generation mainframe in its Z Series family, which is capable of encrypting all data associated with all applications and no performance impact. Yet, as should be expected by now, returns from this new gambit will come in later than expected.

Analysts asked if the mainframe would have much of an impact in the third quarter, since it is shipping in September, and learned of a $1 billion revenue shortfall projected for the third quarter. Instead, the bigger bulk of mainframe revenues are expected in the all-important final quarter of the fiscal year, as it begins a new beneficial hardware cycle.

“On the revenue side of that, typically for seasonal reasons, we see about a $1 billion 2Q to 3Q reduction for seasonality,” said IBM Chief Financial Officer Martin Schroeter. “That typical $1 billion impact will be helped a little bit, $200 million to $300 million by mainframe or the services contracts, but that’s about it for the third. And then obviously the rest will be in the fourth.”

Disappointment showed in IBM’s share price, which was down less than 2% heading into the call, then dropped further to a decline of about 3%. Big Blue’s stock is down more than 7% this year already, even as the Dow Jones industrial average, which counts IBM as one of its 30 components, has gained 9.2% and the S&P 500 index is up 9.9%.

The mainframe, once IBM’s biggest-selling product, still has the ability to have a big swing on its results. IBM reiterated its earnings forecast of $13.80 per share for the full year, so it’s clearly counting on a very big fourth quarter.

Investors were obviously hoping for better news for the third quarter. In addition, its earnings were once again boosted by taxes — the company’s approximate 11% tax rate is the lowest effective rate compared with its tech and S&P 500 peers — said Credit Suisse analyst Kulbinder Garcha, in a note Monday. He also said he believes that lever has run its course and that it is likely IBM will miss its 2017 guidance, at least operationally. Garcha estimates $13.03 a share for 2017 and noted that even with an “unusually strong” mainframe cycle, it may miss expectations at some point in 2017.

For IBM, which has been accused by some investors in the past of managing its earnings with share buybacks, tax gains and other items, it seems like it is back to the future. And wondering if the future will ever arrive.


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