Can it be? A positive looking quarter from International Business Machines (IBM) ? My, how times have changed.
Ever since CEO Arvind Krishna took the position of chief executive in April of 2020 (Krishna took the Chair in January of 2021), he has taken the firm in a more focused direction. Late last year, IBM rid itself of the legacy technology infrastructure business with the Kyndryl Holdings (KD) spin-off. Early feedback feels... kind of optimistic.
Performance
For the firm's first quarter, IBM posted adjusted EPS of $1.40 (+24.4%) on revenue of $14.2B. The sales number beat Wall Street and was good enough for 7.7% annual growth over last year's (adjusted for the KD separation) result. Breaking the performance out by segment...
Software (includes Hybrid Platform & Solutions, Transaction Processing)... revenue of $5.772B, up 12.3% (over 8 points from incremental sales to Kyndryl) producing a gross margin of 78.8%.
- Hybrid Platform sales up 7%
- Red Hat +18%
- Automation +3%
- Data & AI +2%
- Security +5%
- Transaction Processing sales up 26%
* Software Segment hybrid cloud revenue +22%
Consulting (includes Business Transformation, Technology Consulting and Appreciation Operations)... revenue of $4.829B, up 13.3% producing a gross margin of 24.3%.
- Business Transformation sales up 15%
- Technology Consulting sales up 14%
- Appreciation Operations sales up 10%
* Consulting Segment hybrid cloud revenue +24%
Infrastructure (includes Hybrid infrastructure, Infrastructure Support)... revenue of $3.219B, down 2.3% (over 8 points from incremental sales to Kyndryl) producing a gross margin of 50.5%.
- Hybrid Infrastructure sales down 5% (over 8 points from incremental sales to Kyndryl)
- IBM z Systems -19%
- Distributed Infrastructure +5%
- Infrastructure Support flat (+/- 0%) (over 8 points from incremental sales to Kyndryl)
* Infrastructure Segment hybrid cloud revenue -20%
CEO Krishna added a comment to the press release... "Demand for hybrid cloud and AI drove growth in both Software and Consulting in the first quarter. Today we're a more focused business and our results reflect the execution of our strategy. We are off to a solid start for the year, and we now see revenue growth for 2022 at the high end of our model."
As far as that model is concerned, the firm expects to experience FY 2022 constant currency revenue growth at the high end of the mid-single digit range. IBM also expects to see an additional 3.5 point contribution from incremental sales to Kyndryl. IBM also continues to expect $10B to $10.5B in consolidated free cash flow this year.
CFO James Kavanaugh added, "We are a faster growing, more profitable company with a higher-value business mix, a significant recurring revenue base and strong cash generation."
Wall Street
I can find five sell-side analysts rated at either four or five stars by TipRanks that have also opined on IBM since these earnings were released. Among the five, there are three "buy" or "buy equivalent" ratings, and two "hold" or "hold equivalent" ratings. The average target price of the five is $157.60, with a high of $166 (Sami Badri of Credit Suisse), and a low of $140 (Amit Daryanani of Evercore ISI).
Just an aside here... I don't know if Lisa Elis of MoffettNathanson is going to opine on these earnings. Elis is rated at five stars by TipRanks and is one of my favorite analysts in the space. If my information is up to date, Elis last opined on IBM on January 25th (Q4 earnings) when she reiterated a "sell" rating on IBM with a target price of $115. I would love to see if Elis finds some of the same improving optimism in IBM this time around as I do, as I greatly respect her opinion.
Balance Sheet
IBM ended the first quarter with a net cash position of $9.934B, and current assets of $31.33B. Both of these entries grew nicely over the past 12 months. Total current liabilities grew (not as much) as well to $34.056B, as short-term debt grew to $7.69B. Long-time readers know full well that a current ratio of 0.92 gives me some agita. I really, really like to see that ratio rise above the "1" level before I can get enthusiastic, and I like to see it comfortably above that level.
Total assets of $133.275B (that includes $56.106B in "goodwill" and $12.312 in "net intangibles for $68.418 in non-quantifiable assets) dwarf total liabilities of $114.162B of which $46.545B is accounted for as long-term debt. The debt is real. Can one count on intangible assets? Not that they don't exist, they do. But... Can you count on them. I'm sorry. I do have an optimistic feel for IBM for the first time in a long time. That said, this balance sheet is not yet fixed and it does not yet pass the Sarge test.
My Thoughts
Readers will see what these shares are at least short-term overbought. The daily MACD looks okay, but relative strength is becoming extended. I kind of liked these earnings. I think that Krishna is on the right track. There is more work to do. Perhaps for me, IBM is still a quarter (or less) away. For right now, I would love to be able to get a short off for a trade as close to $141 as possible. I probably go as low as $137. My point is that IBM is better, but for now, for me, it's still just a trader.
