IBM Does Not Convince The Market

Over the last few quarters, IBM (Nasdaq: IBM) has been trying to recover from its streak of over five years of revenue declines. It managed to turn the growth around at the end of last year, but there is still a lot more work left to do. It recently reported its first quarter results for the year and while the company reported better than expected results for the quarter, the market remains skeptical about its outlook. The result announcement ended with its stock reporting a decline of 6%.

IBM’s Financials

Revenues for the first quarter grew 5% to $19.1 billion, ahead of the Street’s forecast of $18.83 billion. Adjusted earnings of $2.45 for the quarter were also better than the Street’s estimates of $2.42. The earnings beat was driven by a $810 million tax gain that was recorded during the quarter to account for the US tax law change.

By segment, revenues from Cognitive Solutions, which includes solutions software and transaction processing software grew 6% to $4.3 billion. Global Business Services segment that includes consulting, global process services, and application management grew 4% to $4.2 billion. Technology Services & Cloud Platforms revenues grew 5% to $8.6 billion, Systems revenues improved 8% to $1.5 billion, and Global Financing revenues came in flat at $405 million.

Over the past few years, IBM has gone through a long transition to transform its legacy business in line with the current trends of cloud computing, data analytics, mobile technologies, and security. It refers to these segments as strategic imperatives. For the trailing twelve-month period, revenues from these strategic imperatives grew 12% to $37.7 billion with cloud revenue growing 22% to $17.7 billion. For the quarter, IBM analytics revenues grew 9%, mobile revenues increased 19%, and revenues from security grew 65% over the year.

IBM reiterated an expectation of the year’s EPS of at least $13.80, which was short of the market’s forecast earnings of $13.83 per share.

IBM’s Strategic Initiatives

As part of the focus on these strategic initiatives, IBM made a few acquisitions and entered into several partnerships. Last year, it announced the acquisition of Cloudigo, an Israel-based data center networking startup, for an undisclosed sum. Cloudigo, founded in 2016, offers network infrastructure support for handling user traffic online. Its funding and financial details are not known. IBM plans to leverage the acquisition to help accelerate database processing capabilities.

It also announced the acquisition of Australia-based Vivant Digital business (Vivant), a boutique digital and innovation agency, for an undisclosed sum. Vivant was founded in 2008 and works with Australian financial services and distribution sector firms to deliver improved customer experiences using an approach that integrates insights from behavioural science, data and technology. Prior details of funding and valuation for Vivant are not known.

Besides acquisitions, IBM continued to enhance Watson’s services. It recently announced the launch of IBM Watson Data Kits that are designed to accelerate the development of AI applications. These Data Kits will deliver pre-enriched, machine readable, industry-specific data to organizations to help them scale AI across their business. The kits will be initially released for the travel and transportation and food industries, before being launched for other industries. It is an odd choice of market for Watson to test. Its kits will provide details such as travel points of interest, airlines, and hotel brands to create more engaging experiences for travelers. Within the food segment, the kits will provide AI developers with content for apps that can help users find the menu item, type of cuisine, location, and price they want near them.

It also continued to build its partnerships, and entered into an enhanced agreement with Salesforce. As part of the agreement, the two companies will bring together IBM Cloud and Watson services with Salesforce Quip and Salesforce Service Cloud Einstein to enable companies to connect with their customers and collaborate more effectively with deeper insights. The agreement will result in interactive custom-built applications that can be embedded directly into any Quip document to increase the effectiveness of sales teams.

IBM is taking some of the right measures to adapt itself to emerging technologies. The transformation of an organization this size takes time and sustained effort. But analysts aren’t very patient with the stock. Its stock is trading at $146.53 with a market capitalization of $134.04 billion. It touched a 52-week high of $171.69 in January this year. It had fallen to a 52-week low of $139.13 in August last year.

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