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IBM's Q1 Earnings & Revenues Surpass Estimates, Stock Up

International Business Machines Corporation IBM reported first-quarter 2021 non-GAAP earnings of $1.77 per share, which surpassed the Zacks Consensus Estimate by 6%. However, the bottom line fell 3.8% on a year-over-year basis.

Revenues of $17.7 billion beat the Zacks Consensus Estimate by 1.7%. The top line also improved 1% (as reported) on a year-over-year basis driven by strength in the company’s hybrid cloud business.  Adjusting for currency and divested businesses, revenues were down 2%.

Total Cloud revenues were $6.5 billion during the quarter, up 21% year over year. Adjusting for currency and divested businesses, total cloud revenues increased 18%. The company witnessed solid uptake of cloud-based solutions and digital transformation offerings, driven by synergies from the Red Hat acquisition.

 

Following better-than-expected first-quarter results and year-over-year growth witnessed in the top line, shares of IBM are up more than 3.1% in the pre-market trading on Apr 20. Shares of IBM are up 5.8% compared with the industry’s return of 9.9% in the year-to-date period.

Nevertheless, revenues from services signings fell 27% (at constant currency or cc) to $6.7 billion in the first quarter. Backlog amounted to $104.8 billion, down 7% at cc (down 3% at actual) on a year-over-year basis.

Update on the Pending Spin-Off

IBM’s Managed Infrastructure Services, a unit of its Global Technology Services division, will be spun off into a new public company named Kyndryl and will be helmed by Martin Schroeter as CEO. The headquarters will be in the New York City. The spin-off is expected to be completed by the end of 2021.

Last year, IBM had announced the spin-off of its legacy Managed Infrastructure Services business in a bid to accelerate its hybrid cloud growth strategy. The company aims to focus better on enabling clients with accelerated digital transformation and capitalize on the hybrid cloud opportunity which it considers having a revenue potential of a trillion dollars.

The spin-off is anticipated to strengthen its presence in two different territories by creating two entities to realize business goals and best outcomes. IBM’s open hybrid cloud platform and AI expertise are poised to get a boost from the new deal. Meanwhile, Kyndryl is set to gain new capabilities and greater agility to modernize the architecture of the enterprises.

Red Hat Acquisition Continues to Drive Top Line

Revenues from Red Hat in the first quarter increased 17% (up 15% at cc) on a normalized basis, driven by strong uptake of Red Hat Enterprise Linux and OpenShift platform. Currently, more than 3,000 clients are using Red Hat and IBM’s hybrid cloud platform.

The buyout helped IBM to enhance containerized software capabilities and accelerate service engagement. Moreover, OpenShift and Ansible have supported advancements in application and technology developments.

IBM is also leveraging OpenShift container platform to enable clients to upscale business operations, in a secure manner, via AI-powered Cloud Paks.

Additionally, digital transformation wave has bolstered adoption of cloud-based QRadar, Identity and Trust services as well as CloudPak for Security offerings.

Geographic Revenue Details

Revenues from Americas remained flat on year over year at cc (excluding divestiture impacts) at $8.2 billion. Revenues from Europe, Middle-East and Africa were $5.6 billion, down 5% year over year. Meanwhile, revenues from Asia-Pacific totaled $3.9 billion, down 4% on a year-over-year basis.

Cloud & Cognitive Software Segment

Cloud & Cognitive Software segment’s revenues-external improved 3.8% year over year (up 0.8% at cc) to $5.4 billion. Further, cloud revenues (external) surged 34% to $1.8 billion. The upside can be attributed to synergies from the Red Hat acquisition as well as growth in cloud, Data & AI, security and IoT solutions.

Revenues in the Cloud and Data platforms increased 13% year over year (up 10% at cc) to $2.9 billion. The platform is gaining from Red Hat’s acquisition synergies and traction in Cloud Paks suite.

Revenues from the Cognitive Applications increased 4% year over year (up 2% at cc) to $1.2 billion. Revenues from the Transaction Processing Platforms, which includes software that runs mission-critical workloads, declined 12% (down 15% at cc) on a year-over-year basis to $1.3 billion.

Global Business Services Segment

Revenues in the Global Business Services (GBS) -external segment totaled $4.2 billion, which improved 2.4% (but down 1.4% at cc) from the year-ago quarter.

Global Process Services revenues improved 19% year over year at cc to $0.3 billion. Application Management revenues declined 8% at cc to $1.8 billion, while Consulting revenues improved 2% at cc to $2.2 billion.

Segmental revenues pertaining to cloud advanced 28% at cc from the prior-year quarter’s reported figure to $1.7 billion.

Global Technology Services Segment

Revenues from Technology Services-external fell 1.5% (down 5.3% at cc) from the year-ago quarter’s level to $6.4 billion.

Segmental revenues pertaining to cloud advanced 2% at cc from the prior-year quarter’s reported figure to $2.4 billion.

Infrastructure & Cloud Services and Technical Support Services revenues declined 5% (at cc) year over year to $4.9 billion and $1.5 billion, respectively.

Systems Revenues

Systems revenues-external increased 4.3% (up 2.2% at cc) on a year-over-year basis to $1.4 billion.

Systems Hardware revenues jumped 10% (at cc) year over year to $1.1 billion. Operating Systems Software declined 18% (at cc) year over year to $0.3 billion.

Markedly, IBM Z revenues soared 49% year over year. However, Power revenues slumped 13% from the year-ago quarter’s levels. Storage revenues declined 14% year over year.

Segmental revenues pertaining to cloud climbed 21% at cc from the prior-year quarter’s reported figure to $0.5 billion.

Finally, Global Financing (includes financing and used equipment sales) revenues-external fell 20% year over year (down 21.9% at cc) to $240 million, owing to reduced financing volumes and sale of receivables.

Operating Details

Non-GAAP gross margin expanded 110 basis points (bps) year over year and came in at 47.3%. Gross margin benefited from favorable restructuring efforts and high-value software contribution.

Non-GAAP Research, Development & Engineering (R, D&E) expenses inched up 0.3% year over year to $1.63 billion.

Non-GAAP Selling, General And Administration (SG&A) expenses fell 14.9% year over year to $4.82 billion.

Non-GAAP pre-tax income margin from continuing operations was 10% compared with year-ago period’s 3.9%.

Balance Sheet & Cash Flow Details

As of Mar 31, 2021, IBM had $11.3 billion in total cash and marketable securities compared with $14.3 billion as of Dec 31, 2020.

As of Mar 31, 2021, total debt (which includes $18.3 billion from Global Financing debt) was $56.4 billion compared with $61.5 billion as of Dec 31, 2020.

The company reported cash flow from operations of $4.9 billion ($2.1 billion when excluding Global Financing receivables) during the first quarter compared with $5.9 billion ($6.8 billion when excluding Global Financing receivables) in the fourth quarter of 2020.

IBM generated free cash flow (excluding GF receivables) of $1.5 billion in the first quarter compared with $6.1 billion in fourth-quarter 2020.

Moreover, the company returned $1.5 billion to shareholders in the first quarter through dividends.

Guidance

For 2021, IBM refrained from providing any formal guidance.

Nevertheless, management continues to expect revenues to grow for 2021 based on the current foreign exchange rates. The company also projects adjusted free cash flow between $11 billion and $12 billion in 2021.

Zacks Rank & Stocks to Consider

IBM currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Etsy ETSY, Sirius XM Holdings SIRI and CACI International CACI. Etsy sports a Zacks Rank #1 (Strong buy) while Sirius XM and CACI International carry a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

CACI International is set to release quarterly earnings on Apr 21, while Sirius XM are scheduled to report on Apr 28. Etsy is slated to report quarterly results on May 5.

Long-term earnings growth rate of Etsy, Sirius XM and CACI International is pegged at 19.4%, 13.3%, and 10.5%, respectively.

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