IBM margins shrink again
NEW YORK• IBM fourthquarter sales declined and margins narrowed, indicating that its newer businesses still need to grow to offset development costs.
Revenue slipped for the 19th consecutive quarter to US$ 21.8 billion and operating margins shrank yearover- year for the fifth quarter in a row to 51 per cent, a concerning metric of the company’s overall health.
Armonk, New York- based IBM has been working to sell more of its products under the as- a- service model, in which customers pay as they use the tools instead of agreeing to large multiyear contracts. The shrinking margins indicate those initiatives still aren’t a big enough part of the business, Credit Suisse Group AG analyst Kulbinder Garcha wrote in a note before the results. IBM has also been investing heavily in their newer businesses, and weaker margins show that the investments still need time before they pay off, he wrote.
The shares fell as much as 2.6 per cent in extended trading. The stock ended little changed at US$ 166.81 in New York Thursday.
Since taking the helm in 2012, Chief Executive Officer Ginni Rometty has focused the company on products and services in newer technologies, including cloud computing, security, data analytics and artificial intelligence. In the meantime, older businesses such as computer operating systems hardware and software have been steadily eroding, and investors have been waiting for the declines to be offset by growth in the newer operations.
Some areas have started to show promise. Sales in cognitive solutions, which houses analytics and artificial intelligence software, increased for the third quarter in a row, and the technology services and cloud platforms segment also recorded year over year growth. Much of IBM’s cloud revenue lives in this division. Both segments also posted an increase for the full year.
This year, IBM expects operating earnings of at least US$ 13.80 a share, it said in a statement Thursday, compared with US$13.74 that was the average analyst estimate. The company reported fourth quarter profit, adjusting for some items, of US$ 5.01 a share, beating the average projection of US$ 4.88. Analysts have pointed to lower tax rates as helping to boost EPS. IBM’s fourth- quarter effective tax rate was 9.5 per cent, down from 12.5 per cent the previous year.
Over the past few years, IBM had also divested some less profitable segments to better focus on its growth areas. More recently, the company has started to license more older intellectual property to divert resources toward developing more cloud, analytics and artificial intelligence technology. IBM reported income of more than US$ 500 million in the fourth quarter from IP, which includes the licensing deals and royalty collections, as well as doing custom development and selling IP outright. That’s up from US$193 million a year earlier.