International Business Machines Corp. Shrugs Off Lower Sales, Boosts Profits

International Business Machines (IBM -0.89%) reported fourth-quarter results on Thursday night.

IBM's fourth-quarter results: The raw numbers

Data source: IBM earnings release. GAAP = generally accepted accounting principles; EPS = earnings per share.

What happened with IBM this quarter?

As usual, IBM saw total sales sliding due to a shifting business mix, and several divestitures during the last four quarters. At the same time, profits held steady and margins widened in general:

• On the upside, the cognitive solutions and technology/cloud platforms divisions reported small year-over-year revenue increases. Meanwhile, global business services saw revenues sliding 4% lower, and systems sales came in 12.5% below the year-ago period.
• Full-year revenues under the strategic imperatives banner rose 13% year over year, led by 35% higher sales of cloud services.
• IBM generated $4.7 billion of free cash flows in the fourth quarter. Big Blue returned $1.3 billion to shareholders in the form of dividends, and spent $0.9 billion on share repurchases in the quarter.

Management provided the following outlook for fiscal year 2017:

• Full-year GAAP earnings should land at or above $11.95 per diluted share, down from $12.39 per share in 2016.
• Free cash flows should amount to at least 90% of GAAP net income. Last year, $4.7 billion of free cash flows exceeded the bottom-line net income figure by 5%.

Watson, here seen competing in an episode of Jeopardy, stands at the heart of IBM's cognitive solutions business. Image source: Getty Images.

What management had to say

CEO Ginni Rometty continued to beat the drum for IBM's strategic imperatives: "In 2016, our strategic imperatives grew to represent more than 40 percent of our total revenue and we have established ourselves as the industry's leading cognitive solutions and cloud platform company," she said in a prepared statement. "IBM Watson is the world's leading AI platform for business, and emerging solutions such as IBM Blockchain are enabling new levels of trust in transactions of every kind."

By comparison, strategic imperatives worked out to 35% of total revenues in 2015.

Looking ahead

IBM used to be a one-stop shop for every IT and computing need, but Rometty is taking Big Blue in a new direction. Under her watch, the company has focused on promising high-growth markets such as security, cloud computing, and artificial intelligence, collected under that ever-present "strategic imperatives" header.

That bucket of business should outgrow IBM's remaining operations at some point in the next couple of years, and a 40% revenue share makes for a respectable operational focus today.

Investors started warming up to IBM's new direction in 2016 after several years of sliding share prices; current shareholders can look back at a market-beating 28% return over the last 52 weeks. The strategy won't change in 2017, and we will just have to wait and see whether the market momentum will hold up.