Trouble Ahead??

Here is the WSJ coverage today... The source link is below but it's paywalled...

IBM’s Growth Comes at a Cost

Aging tech giant’s revenue finally rises, but investments expected to curb earnings growth for year ahead

By Dan Gallagher

Jan. 19, 2018 1:43 p.m. ET

Even for IBM , IBM -3.99% growth doesn’t quite solve everything.

International business Machines reported Thursday that fourth-quarter revenue rose nearly 4% year over year. Even adjusting for a boost from favorable currency rates, Big Blue’s top line managed its first period of growth in nearly six years. Strong sales of systems hardware business along with IBM’s growing cloud-computing service contributed to the uplift.

Still, IBM’s shares fell Friday, much like they have done following 10 of its last 12 quarterly reports. A bit of growth, as it turns out, isn’t quite enough to assuage concerns about how the company gets there. Fourth-quarter gross margins slipped below the 50% line for the first time in five years for what is typically the company’s strongest seasonal period. And, while IBM did project annual revenue growth for 2018, it is unclear if the company can do that without continued help from favorable exchange rates.

Given that IBM’s stock had jumped more than 15% since its last quarterly report, some disappointment was bound to set in. The company also expects a slight drop in free cash flow in 2018 due to increased capital spending in key segments to drive future growth. IBM did manage to close 2017 with a small gain in adjusted per-share earnings of $13.80 after three years of declines. But the company also projected flat earnings for 2018, given its need to invest more in its business.

Those investments have borne some fruit. The “strategic imperatives” IBM has been so focused on for the last few years accounted for 46% of total revenue for 2017, compared to 41% the year before. While encouraging, for an overall business that has been in steady decline for the last six years, investors are now willing to take only so much on faith.

SOURCE: https://www.wsj.com/articles/ibms-growth-comes-at-a-cost-1516387395

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GBH Insights analyst Daniel Ives covered this:

“While the headline numbers were slightly ahead of expectations, the all important Strategic Imperatives segment (17% growth, 14% constant currency) was in line with the Street’s estimate, but the bulls were hoping for a clean beat on this key growth segment which represents the underpinnings of the IBM turnaround story in 2018.

The Strategic Imperatives segment remains the main fuel in IBM’s diesel engine heading into 2018 as it represents roughly 50% of revenues and is growing double digits thus helping neutralize some of the massive headwinds on its traditional mainframe hardware business.

The quarter/guidance overall we would characterize as a small step in the right direction for Rometty and IBM as the combination of healthy cash flow, strong growth on next generation software areas (big data, analytics, cloud, security), and “good enough” 2018 guidance as enough for the bulls to hang their hat on tomorrow morning.”

"The “strategic imperatives” IBM has been so focused on for the last few years accounted for 46% of total revenue for 2017, compared to 41% the year before."

At that rate it's going to be a long time before they can carry the company.

Question-do the leaked possible reorganization and potential layoffs of much IBM staff and layoffs figure into IBM's projection of flat earnings per share for 2018? Not something they will advertise in advance on their earnings call. However, severance costs are high and presumably affect the bottom line. If so, the potentially lower labor costs once the reorganization is done would help to increase IBM's earnings per share in 2019 and thereafter.

As to the potentially higher tax rate for 2018, IBM figured it out in the past with apparently a very strong tax staff. Given the complexities of the new tax law, there may be as yet unseen ways to reduce IBM's US taxes. IBM lowered its taxes way below the expected tax rate in the last few years.

Thread regarding IBM layoffs

Trouble Ahead??

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