Big Blue is making a big jump on Wednesday morning.
Shares of International Business Machines (IBM) shot up over 7% in early market trading after a beat on top and bottom line earnings and a forecast that highlighted room to move higher.
The Armonk, New York-based tech titan reported $4.87 in earnings per share, down 5% from the same period a year ago but above FactSet consensus of $4.82 per share. Revenue also fell year over year to $21.76 billion, but came in above the analyst expectation of $21.72 billion.
More positively still, the company forecast "at least" $13.90 in earnings per share and $12 billion in free cash flow for 2019, which comes in above expectations on earnings and in line with cash flow forecasts. The steady cash flow forecast is an important one, as cash flow has been an area of concern given the company's heavy dividend focus and its recent $34 billion blockbuster deal for Red Hat (RHT) .
"Despite the mainframe cycle headwind, IBM delivered full year revenue growth and its first quarter of gross margin expansion as Software rebounded and the Services growth and margin recovery continued," Morgan Stanley analyst Katy Huberty wrote in her review of earnings. "Guidance implies profit growth in 2019 with management highlighting more tailwinds than headwinds."
Pivot to Profitable SegmentsOne of the key tailwinds highlighted by management was the company's cloud focus, a segment that generated $19 billion in revenue in 2018 and should be bolstered further in 2019 by the company's aggressive acquisition of cloud leader Red Hat.
"We announced the sale of select software and services businesses, actions that not only improve our go-forward revenue profile but allow us to increase our focus and investment in the high value segments of IT in areas like hybrid cloud, AI, and blockchain," CFO James Kavanaugh told analysts on Tuesday. "All of this provides a solid business and financial foundation for the addition of Red Hat."
The cloud segment has already been a bullish segment among IBM watchers as partnerships with Juniper Networks (JNPR) , BNP Paribas (BNPQY) , Vodafone Group (VOD) , and Walmart (WMT) have suggested that a strong pipeline of cloud companions is available, especially as Red Hat joins the Big Blue fold.
"IBM's fourth quarter results signaled strength in software, analytics and services focused on hybrid cloud and digital strategy," Morgan Stanley's Huberty wrote. "Better than expected demand for these segments at IBM similarly align with feedback from our latest survey where CIOs ranked Cloud Computing, Digital and BI/Analytics increased in the ranking relative to Security Software and CRM Applications to become top three initiatives."
IBM's pivot to a pinpoint focus on these offerings is therefore a prudent one, in her view.
Cognitive Solutions, which houses the AI efforts of IBM, saw a a 2.2% increase in sales, reversing the 5% decline recorded in the previous quarter. The change in fortunes on the segment is suggestive of a secular trend in demand for these products, management told analysts.
Kavanaugh added that Banco Bradesco (BBD) , a Brazilian baking giant, is also inking an all-in agreement to bring its business up to technological and productivity standards up to snuff alongside IBM. The deal highlights the global scope of tech demand across industries that buoy the companies big blue sky forecast.
Running with Red HatThe global demand for cloud services in particular could make IBM's focus on the segment and its aggressive $34 billion splash for Red Hat justified.
"From a value perspective, in addition to the growing Red Hat business itself, we see an opportunity to lift all of IBM by selling more of our own IBM Cloud and by selling more of our analytics and AI capabilities on OpenShift across multiple platforms," Kavanaugh said. "We've had a decade-long partnership with Red Hat and extended it nearly a year ago around hybrid and multi-cloud. And now, after the announcement in late October, we've begun the internal enablement planning so we can hit the ground running post closing."
The hybrid cloud innovation alongside Red Hat has been highlighted by TheStreet founder and Action Alerts Portfolio manager Jim Cramer as a key thesis for those looking at the stock's 2019 prospects as it seeks to compete with cloud kings like Amazon (AMZN) and Microsoft (MSFT) .
Kavanaugh clarified that while Red Hat has already fielded orders for hybrid cloud and the transaction was all but unanimously approved by Red Hat shareholder. The acquisition is not included in the company's overall forecast.
"Given the financial implications to 2019 are heavily dependent on the timing of the closing, Red Hat is not included in our expectations. We'll update our view of the year at the time of closing," Kavanaugh clarified.
The guidance does, however, include the impact of divestments from agreements with HCL Technologies in software products in order to maintain laser focus on the higher growth segments like cloud and blockchain.
"Over the last four years, we have been prioritizing our investments to develop integrated capabilities in areas such as AI for business, hybrid cloud, cybersecurity, analytics, supply chain and blockchain," said John Kelly, IBM senior vice president, Cognitive Solutions and Research after the $1.8 billion divestment deal was disclosed. "We believe the time is right to divest these select collaboration, marketing and commerce software assets, which are increasingly delivered as stand-alone products."
The move has made clearer the turnaround for the 107-year old American IT leader, as many analysts welcomed the increased visibility on the company's path to profitability through segments that could signal further secular growth.
"IBM's transformation slower than anticipated, but we see the company accelerating the pivot to growth as CIO priorities align with investments in Strategic Imperatives and combine with divestitures of non-core businesses," Morgan Stanley's Katy Huberty commented, noting that the "cleanest quarter in years" from the company is a good sign for shareholders overall.
The jump, if pre-market gains hold, would signify the company's largest earnings day price jump since October 2017.
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