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After three consecutive quarters of revenue growth, International Business Machines (NYSE: IBM) was unable to maintain the ball in the third quarter. Revenues decreased 2% from the previous year to $ 18.8 billion, exceeding analysts' estimated average estimate of more than $ 300 million.
This fall in revenues was enough to drop the stock Wednesday morning. But there was a lot to like about the IBM report.
IBM's headquarters in Armonk, NY. Source of the image: IBM.
Currency, mainframes and the cloud
Since most of IBM's revenue comes from outside the United States, a stronger US dollar tends to lower the company's growth rate. That's exactly what happened in the third quarter. While reported revenues fell by 2%, adjusted revenue for the currency remained unchanged from the third quarter of 2017. Foreign exchange effects made the IBM report more gloomy than it was. Was really.
A big surprise in IBM's third quarter report was the persistent strength of its latest z14 mainframe system. The typical central computer cycle involves four quarters of growth, followed by a decline until the next hardware refresh. IBM began shipping the z14 in the third quarter of last year. As a result, sales were expected to decline in the third quarter of this year. But IBM has managed to grow its mainframe business by 6% over one year. The company has not recorded five consecutive quarters of mainframe growth since 2007.
The IBM mainframe business figure will almost certainly decline in the fourth quarter. But the z14 being "the best performing of our platform's long history," according to financial director James Kavanaugh when calling the results, it's clear that the central computer is alive and well at the moment. Cloud era.
As for the cloud, IBM's cloud business grew by 13% adjusted to reflect the currency in the third quarter. Cloud computing revenue in the last 12 months has reached $ 19 billion and the annual cloud processing rate provided as a service is now $ 11.4 billion.
IBM's cloud strategy aims to help customers navigate a wide range of cloud options. The company announced its Multicloud Manager earlier this week, a tool to manage workloads on various public clouds and on-premises hardware. And he recently announced that IBM Cloud Private, his private cloud platform more than a year old, had been adopted by more than 400 global companies.
IBM is a company that provides integrated solutions to its customers. Its cloud computing strategy goes in the same direction.
Stabilization of the margin
Gross margin has been a problem for IBM throughout its transformation over the last six years. The company managed a GAAP gross margin of 45.8% in 2017, down from 50% in 2014.
After years of massive investment in growing new businesses, IBM's gross margin is finally showing signs of stabilization as these companies move up the ladder. IBM's overall gross margin remained stable in the third quarter compared to the previous year. This may not seem terrible, but it's the best gross margin performance in three years.
Service segments were the main drivers of IBM gross margin stabilization. The global business services sector grew revenue by 3% and gross margin by 2.7 percentage points, while technology services and cloud platforms generated revenue. stable and an improvement in the gross margin of 1.2 points. An evolution towards higher value offers, improvements in productivity and an increase in the size of some companies have been responsible for improving margins.
IBM's overall tax margin increased by 0.5 percentage points on a non-GAAP basis to 19.2%. This helped to increase non-GAAP earnings per share by 5% to $ 3.42. The company has reiterated its forecast for the full year, asking for at least $ 13.80 earnings per share and about $ 12 billion in free cash flow.
The value of a stock comes ultimately profits, not earnings. IBM is still struggling to increase its business, but the improvement in the margin expected by investors seems finally to have arrived. If IBM generates profit growth in 2019 and beyond, the stock slaughtered could be due to a recovery.
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