On January 20, all eyes were glued to the release of the fourth-quarter earnings of International Business Machines (IBM, Financial) which were not that impressive as expected by analysts. Though the earnings did surpass the estimates, the tech giant failed to meet the revenue expectations for the quarter. Also the outlook for 2015 remains a bit cautious and this sent the stock price down by 2.2% after the earnings release. Let’s dig deeper to find out the major highlights of the fourth quarter and what outlook was meted out by the management for the 2015 fiscal year.
Revenue across segments were a number mix
The company reported revenue of $24.1 billion, falling short of analyst consensus estimates of $24.77 billion. Global Technology solutions, the company’s largest segment, saw decline in revenue by 8% to $9.2 billion. This clearly missed the Street estimates that were hooked to sales of $9.53 billion for this line of business.
The technology and consulting division has been struggling with the revenue decrease for the past three years, as business customers are randomly moving away from buying large mainframe computers and traditional software that’s installed in their own systems.
Thus, to keep its revenue at a decent level, the company was investing hugely in developing new products such as data analytics and artificial intelligence programs and “Cloud” software which IBM sells to customers over the web. The CEO, Ginni Rometty, stated during the earnings call, “In 2014, we repositioned our hardware portfolio for higher value, maintained a services backlog of $128 billion and achieved strong revenue growth across cloud, analytics, mobile, social and security. Together these strategic imperatives grew 16 percent in 2014 and now represent $25 billion and 27 percent of our revenue…”
In fact, Cloud revenue was up by a whopping 60% through fiscal year 2014 while business analytics grew by 7% to about $17 billion. CFO Martin Schroeter noted that the company is looking forward to more acquisitions of service players as well as major partnerships like it pursued with Apple Inc. (AAPL, Financial) in 2014 in the mobile communications space to act as boost to its revenue stream.
Earnings not great, but went over analysts’ estimates
IBM reported fourth-quarter earnings of $5.81 per share, better than what the Street was thinking at $5.41 per share but straight down 6% year over year. Operating net income from continuing operations also fell 13% in the quarter to $5.8 billion.
Such a fall of earnings is due to the continued headwinds that it faces in the dwindling demand for its servers and storage products. Currently the company has announced that its doing a shift in its business plan by divesting its underperforming businesses in an attempt to realign itself with the sector’s shift to higher-margin businesses such as security software and cloud services.
Outlook remains soft for next fiscal
The company has set the earnings guidance for 2015 at operating EPS in a range of $15.75-$16.50 a share, which clearly is below the Street consensus estimate of $16.51 a share. As the world’s largest technology service provider was not able to match the forecast meted by the analysts for the coming year, the stock responded negatively and travelled down almost 3% in after-hours trading.
IBM’s CFO stated during the earnings presentation with regard to the fiscal year 2015, “We're continuing to invest in both offerings and operational capabilities… with focus on targeted investments in mobility, security and Cloud."
It’s possibly because of the currency headwinds that are temporary in nature, and the transformation that is gathering pace that IBM’s top brass have taken a cautious stand for the 2015 fiscal year. However, the top bosses seem upbeat that the year will be better than the year before, leaving the company well positioned in the information technology business.
Final thoughts
IBM and other tech stalwarts are facing major headwinds as they need to adjust to the new Cloud paradigm shift, which coupled with a cloudy IT spending environment have negatively impacted the results of the full year of 2014. However, as the company is investing in business analytics and cloud business lines it expects to see greener pastures this year, though some of these headwinds could remain to drag its top and bottom line in 2015. Thus, the management’s outlook is a cautious on,e and we should stay tuned to see how IBM advances in the first quarter of 2015 and whether it’s able to sustain its dominance in the tech market.
