IBM Raises Earnings Guidance on Strategic Imperatives and Cloud Segments

Technology giant IBM reported better than expected Q4 earnings after the close Tuesday. $IBM raised future guidance and also reported full-year revenue of $79.6 billion, up 1% and the first year-over-year growth in 7 years. 

Technology giant IBM reported better than expected Q4 earnings after the close Tuesday. $IBM raised future guidance and also reported full-year revenue of $79.6 billion, up 1% and the first year-over-year growth in 7 years.

IBM Cloud

International Business Machines NYSE: IBM Reported Earnings After Close Tuesday

 $4.87 Beat $4.82 EPS Forecast AND $21.76B Beat $21.75 Billion forecast in revenue. 

Earnings 

International Business Machines (NYSE:IBM) reported Q4 adjusted operating earnings, excluding charges related to the Tax and Job-cuts Act, at $4.87 per share, 6% lower year on year but surpassed estimates. On an unadjusted basis, the company reported a profit of $1.95 billion or $2.15 per share, compared to a loss of $1.05 billion or $1.14 per share in the same period of 2017, beating analyst estimates for $4.82. It reported revenue of $21.76 billion, slightly ahead of the $21.75 billion forecast.

December-quarter revenues were down 3% from the year-ago quarter but came in above the Wall Street estimates. The top line contracted for the second quarter in a row. During the three-month period, a 5% growth in Strategic Imperatives and a 6% increase in the cloud business were more than offset by the muted performance of the other segments.

International Business Machines NYSE:IBM

Market Reaction After hours $176.59 USD 130.60 +8.08 (+6.59%)

“In 2018 we returned to full-year revenue growth, reflecting growing demand for our services and leadership solutions in hybrid cloud, AI, analytics and security. Major clients worldwide, such as BNP Paribas, are turning to the IBM Cloud and our unmatched industry expertise to transform their businesses and drive innovation,” said CEO Ginni Rometty.

IBM earnings Q4 2018

Outlook

Looking ahead, the management expects full-year 2019 adjusted operating earnings to be $13.90 per share. It sees unadjusted earnings of $12.45 per share and cash flow of about $12 billion for the year.

 

IBM Acquistion of Red Hat Inc NYSE: RHT

In October, Red Hat agreed to be acquired by International Business Machines (IBM) for $34 billion, in one of the biggest deals in the tech sector in recent times. Shareholders of Red Hat voted on the acquisition at a special meeting  whereby Red Hat  shareholders overwhelmingly approved the deal on January 16, 2019. More than 80% of the 176-million shareholders voted in favor of the transaction, which has already been ratified by Red Hat’s board of directors.

As per the terms of the transaction, Jim Whitehurst, Red Hat’s chief executive officer, will join IBM’s leadership team. By acquiring Red Hat, IBM intends to strengthen its foothold in the cloud computing market and return to the growth path. Of late, profitability has been affected by the ongoing slump in the PC market and IBM’s overdependence on its low-margin core business,

On completion of the transaction, Red Hat will become a part of the Big Blue’s Hybrid Cloud division and will start contributing to cash flow and gross margin within twelve months. Red Hat’s software development prowess will give IBM the strength to compete effectively with Amazon (AMZN) and Microsoft (MSFT) in the areas of cybersecurity and cloud computing.

Red Hat Three Core Business Segments

  • Infrastructure business

Red Hat derives two-thirds of it’s revenues from it’s infrastructure core. This segment continues to grow, up 15% last quarter. The free cash flow from this segment has grown 14 out of the past 15 years, the only fall during the GFC in 2008. This consistency from it’s subscription business model demonstrates a highly stable basis where margins are defensible.

  • Training & Consulting 

This segment has taken off with Red Hat’s growth stategy, growing 27% last quarter. Red Hat has a strong partner base that includes IBM, Intel, Dell Technologies, Google cloud platform, Microsoft Azure and Amazon Web Services (“AWS”) to drive growth. The company’s collaborations with cloud providers like Amazon, Google and Alibaba positions it for significant top-line growth. This is helping Red Hat to cross-sell cloud-based technology across its customer base.

  • Apps and Emerging Technology 

The segment that excites many analysts is apps and emerging technology which surged over 40% last quarter. Morgan Stanley in a note  is looking for “Acceleration of growth in the emerging business segment aided by growing demand for the OpenShift and OpenStack platforms. Rising margins that push cash flow growth above the 20-percent mark.” 

Stifel says that Red Hat’s Q4 report should confirm the company still manages to “elevate its strategic positioning” and can sustain a low-to-mid-teens growth rate, 30-percent emerging product growth and billings growth in the mid-teens.. 

Aquisition Strategy

Complementary acquisitions have led to a favorable product mix which is boosting overall results. Red Hat has made the following complementary acquisitions; 3scale, Ansible, FeedHenry, eNovance, Inktank and Codenvy.

This has enabled an expanded product portfolio into higher-growth segments, such as Hybrid cloud and other emerging technologies including Cloud Management, OpenShift, OpenStack, and Storage.

During Q4 Red Hat acquired CoreOS, an innovator and leader in Kubernetes and container-native solutions, for $250 million. 

Source: Red Hat, Stifel

Red Hat Q3 Earnings Recap

Red Hat Earnings Beat Consensus Estimates, Miss on Revenue

Red Hat  adjusted earnings rose 32% to $0.96 per share above analysts’ forecasts. Reported profit was $94 million or $0.51 per share, compared to $102 million or $0.55 per share in the third quarter of 2017.  RHT was expected to report earnings of $0.87 per share for the November quarter when revenues are predicted to grow 14% year-on-year to $853.6 million however revenues were lower up 13% annually to $847 million, helped by a 13% growth in subscription revenues. Deferred revenue balance at the end of the quarter was $2.5 billion, up 20% compared to last year.

In the second quarter, a sharp increase in operating costs ate into earnings where excluding one-time expenses, earnings grew 11% to $0.85 per share with 14% revenue growth.

Red Hat this week bought Boston-based tech firm NooBaa for an undisclosed amount.  RHTy has been focusing on hybrid cloud architecture and cloud-enabling technologies.

RHT Q3 2018 earnings

 

Source: Red Hat, Stifel

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