International Business Machines Corp. (IBM, Financial) reported first-quarter earnings that beat analyst expectations on the earnings front, but the stock price has been edging lower and lower as the company saw its revenues decline for the 20th consecutive quarter.
IBM posted earnings per share of $2.38 on the back of $18.16 billion in revenues, while the market was expecting earnings per share of $2.35 and revenue of $18.39 billion. The company’s first-quarter revenues of $18.155 billion were 2.8% lower than the $18.864 billion it made during the first quarter of 2016. The revenue decline since 2011 has been so fast and furious that not many are able to look beyond the revenue numbers.
One major problem was the 2.8% decline was a little bit more than the 2.2% revenue decline IBM reported for full fiscal 2016. The company’s stock price recovered nicely in 2016 due to the expectation its rate of revenue decline had come down considerably and that IBM was getting closer to balancing its losing revenue streams with gaining ones.
But for that to happen, the rate of decline has to contine moving lower. Unfortunately, the decline was a bit more than last year, which is why the stock moved sharply lower after the earnings results.
Revenue from strategic imperatives, which includes IBM’s analytics and cloud businesses, grew 13% to reach $7.8 billion. Cloud reported $3.5 billion in quarterly revenues, representing a growth of 35% from a year ago. The only silver lining for IBM is that its strategic imperatives revenue of $7.8 billion is nearly 43% of its overall revenue.
This segment, as seen in the chart above, is quite capable of growing at double-digit rates. But until it starts accounting for more than half of IBM’s overall sales numbers, revenue is going to keep declining every quarter.
The losing parts of IBM’s business may accelerate the process, as just experienced during the quarter. Despite strategic imperatives adding nearly $800 million to overall sales numbers when compared to the prior quarter, IBM’s net revenues declined by $529 million.
For IBM to recover some ground, the next few quarters are critical. Either the slowdown in legacy businesses has to be arrested or the company needs to become more aggressive on the growth front with its forward-looking units. There is no other conceivable way for IBM stock to return to an upward path. It is going to be an uphill battle, but thankfully, strategic imperatives have almost brought IBM to the verge of a breakthrough.
Disclosure: I have no positions in the stock mentioned above and no intention of initiating a position in the next 72 hours.
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