Revenues actually grew this quarter
Putting an end to 22 consecutive quarters of revenue declines, IBM actually lifted its top line in its final quarter of 2017. Q4 revenues reached $22.5bn (€18.4bn), up four per cent on the corresponding quarter last year, or one per cent adjusting for currency.
Revenues were propelled by IBM's Systems segment, which includes all hardware and OS software, surging by 32 per cent year on year to €3.3bn, or 28 per cent adjusting for currency. Its mainframe server offering, IBM Z, grew by 71 per cent year on year, while storage hardware was up by eight per cent.
But the firm highlighted cloud revenues as the most positive takeaway from its results. These grew 24 per cent year over year in 2017 to $17bn.
"In Systems, we had another strong quarter with double-digit revenue growth. All three brands, IBM Z, Power and Storage, grew. We continue to deliver innovation in our systems to enable them to run the most contemporary workloads. Now roughly half of our Systems revenue in 2017 address workloads in the areas of our strategic imperatives," said Martin Schroeter, senior VP of global markets at IBM, on an earnings call transcribed by Seeking Alpha.
But shares fell off the back of dwindling margins
Despite breaking a 22-quarter curse of declining revenues, Big Blue's Q4 did little to impress the stock market. IBM shares fell by 3.4 per cent in after-hours trading to $163.45 following its earnings release.
This was mainly due to a gloomy margins outlook for IBM for this year. Operating gross margin was down by 1.4 percentage points year on year. Furthermore, the market was expecting IBM to reach an operating profit of at least $13.92 per share in 2018, but the vendor disappointed analysts when it projected profits would only reach $13.80.
On the earnings call, CFO James Kavanaugh said IBM would also be hit with higher taxes in 2018 compared with the previous year. He projected an operating tax rate of 16 per cent "plus or minus two points," representing a four-point increase on 2017's operating tax of 12 per cent.
In addition, the enactment of the Tax Cuts and Jobs Act in December 2017 caused IBM to incur a one-off charge of $5.5bn in Q4.
"Tax will be a headwind in 2018 year to year", Kavanagh said.
Services are coming under pressure
Although revenues grew in Q4, margins were down across most of IBM's segments, which also seemingly hit the stock market's confidence. Gross margins for its Global Business Services (GBS) unit fell by two points year over year, according to the firm, due to "currency dynamics" during the quarter as well as costs incurred through streamlining its practices across digital, cognitive and cloud.
Its Technical Support Services also fell by two points year over year. IBM claims some new large contracts won during the quarter came in at lower margins than expected.
One analyst on the firm's earnings call commented that the margin erosion across IBM's services business was "actually the worst we've seen in history on a pre-tax basis", and they didn't improve as the firm expected.
"When we got to the fourth [quarter], we were up about two points [profit margin]. Quite frankly, we thought we could have probably gone to about 2.5 points. The shortfall there was really driven by two things. One is mix. We had a terrific, terrific Systems quarter. Our Systems business is high margin, but it's not as high a margin as our software business, so that had an impact on mix," said Schroeter.
"Throughout 2017, we talked about the headwinds we faced in our TS & CP business around some large contract conclusions that was delayed in 2017. We didn't realise it until the very end. We are going to start off 2018 in a much better position on margin, and we see overall stabilisation beginning immediately," added Kavanaugh.
EMEA declined, but problems in the UK and Germany have been ironed out
Revenues in the Americas climbed by four per cent in Q4, but EMEA continued to put a drag on sales, as revenues dipped by 1.5 per cent. Big Blue has repeatedly put the blame on the performance of the UK and Germany for its flagging EMEA business. The firm has pointed to macro and geopolitical trends that have affected growth in both regions.
Schroeter said that France, Spain, the Middle East and Africa proved bright spots for IBM in Q4, but the UK and Germany continued to perform negatively.
"This quarter, we had growth in France, Spain and the Middle East and Africa region, offset by weakness in the UK, Germany and Italy. You'll remember that the UK and Germany were impacted by the contract dynamics at the end of 2016, and we've now wrapped on those," he said.
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