IBM: Strong Numbers but Muted Plans and Guidance

IBM (IBM) shares quite unexpectedly surged in yesterday’s after-hours and today’s premarket although the tech mogul has been disappointing lately. IBM’s Q4 2021 revenue rose 6% YoY and earnings also beat expectations. For the period ending Dec. 31 2021, the iconic PC, software and cloud designer earned $3.35 a share on $16.7 billion in sales, compared to estimates of $3.29 a share on $16.1 billion in revenue. IBM (IBM) added that its cloud and cognitive software units generated $7.27 billion in revenue, up 8% YoY. For the year, the company reported a profit of $5.74 billion, or $6.35 per share. Revenue was reported as $57.35 billion.

In the prior quarter, IBM’s revenue from continuing operations increased by 2%. The company showed its fastest revenue growth since the third quarter of 2011. Net income in Q4 jumped 72% from a year earlier to $2.33 billion, while gross margin narrowed to 56.9% from 58.9%.

During the quarter, IBM divested its Kyndryl (KD) unit, specializing in managed infrastructure, where revenues and earnings have been declining for years. However, in IBM’s last earnings report, IBM Chief Executive Arvind Krishna discouraged analysts from using the word “disruption” related to the spinoff and stressed that he would characterize the transition as resulting in a “slight pause.” In addition, the consulting unit saw revenue climb 13% to $4.75 billion, while infrastructure-related revenue declined 0.3% to $4.41 billion. Earlier this month, IBM said it would sell its Watson health unit to Francisco Partners for an undisclosed amount.

The company now has 3,800 clients, or 1,000 more than a year ago, Krishna said during the conference call. Also in the conference call, executives underscored that revenue growth and free cash flow were the centerpiece of their 2022 forecast for IBM. Predictions for full-year revenue growth were in-line with the consensus forecast where the average prediction for 2022 called for $59.48 billion, or a 3.7% increase from 2021. He also stressed that the company is going to have a “different business skew throughout 2022” in profitability tilted 40/60 towards the second half of the year, with the first quarter expected to “potentially be the lightest”.

The main concern that should make investors wary is IBM's apparently prolonged period of normalization following the Kyndryl unit spinoff, along with its posting the strongest dynamic in the non-core business units, while the core ones are yet to find more traction. Although its P/E and P/S at around 26x and 1.67x look reasonable, its P/BV at 5.6 is apparently excessive and needs more time and efforts to get closer to reality.