On Jan. 19, International Business Machines Corp. (IBM, Financial) reported net income of $4.5 billion and diluted earnings per share of $4.73 based on U.S. generally accepted accounting principles for fourth-quarter 2016. These values outperformed fourth-quarter 2015 values, with net income and EPS increasing 1% year over year and 3% year over year respectively. The higher net incomes resulted from higher IBM Cloud revenues.
Brief summary of earnings report
From full-year 2015, IBM’s cloud revenues for full-year 2016 increased 35% to $13.7 billion while strategic imperatives revenues increased 13% to $32.8 billion. Higher cloud as-a-service annual exit run rates, which increased 61% year over year, contributed to strong fourth-quarter 2016 earnings results.
CEO Ginni Rometty praised IBM’s strategic imperatives, which represent 41% of the company’s revenues. Additionally, IBM established the “leading cognitive solutions and cloud platform company” in its industry in IBM Watson, the “world’s leading AI platform” for businesses and emerging solutions. Rometty also discussed how the IBM Cloud attracted more clients due to differentiated capabilities helping to improve companies in several market sectors, including financials, industrials and consumer discretionary.
IBM operates as five business segments: Cognitive Solutions, Global Business Services, Technology Services & Cloud Platforms, Systems and Global Financing. The Cognitive Solutions and Technology Services / Cloud Platforms segments had increasing revenues due to growth in cloud analytics and strong hybrid cloud services respectively.
For full-year 2017, IBM expects operating diluted earnings per share of at least $13.80, about 20 cents higher than full-year 2016 operating diluted earnings per share.
Company has good financial outlook
With a financial strength rank of 5 and a profitability rank of 7, IBM has a good financial outlook for 2017. The company generated $3.2 billion in net cash from operating activities, which contributed to a free cash flow of $4.7 billion. For full-year 2016, IBM generated free cash flow of $11.6 billion and returned $8.8 billion to shareholders through dividends and share repurchases.
Even though IBM’s cash-to-debt ratio is a poor 0.24, the information technology services company has solid interest coverage of 21.96. The company’s operating margin and return on equity outperform 81% and 99% of competitors, and its return on invested capital significantly outperforms its weighted average cost of capital (WACC).
IBM’s stock price closed at $166.81 per share Jan. 19. While the stock price remained flat during the past 24 hours, IBM’s stock price generally increased during the past three months.
Warren Buffett (Trades, Portfolio) and Prem Watsa (Trades, Portfolio) own the largest two stakes in IBM as of Sept. 30, 2016. Buffett owns 81,232,303 shares, about 8.54% of IBM’s total shares outstanding. The “Canadian Buffett” has the second-largest stake with 1,362,500 shares.
Jan. 20 update: cloud revenues do not match up with total revenues
Although IBM’s cloud revenues increased 35%, these revenues take a long time to materialize into total revenue. The IT services company’s three-year revenue growth is negative 2.2%, close to a 10-year low. Company revenues from continuing operations dropped about $2 billion from full-year 2015 to full-year 2016, about a year over year decline of 2%.
Despite lower quarterly revenues, IBM’s earnings exceeded expectations for fourth-quarter 2016 and full-year 2016 as discussed earlier in the article. IBM’s stock price closed at $170.55 per share, about 2.24% higher than its previous close of $166.8 per share.
Disclosure: No position in IBM.
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