When International Business Machines (IBM 1.05%) reported the financial results of its 2017 fourth quarter in January, investors rejoiced, as the company reported revenue growth for the first time in nearly six years. Those 22 quarters of year-over-year revenue declines had plagued the company, and investors are now cautiously optimistic after three successive quarters of flat to growing sales.
Despite the improving performance, Wall Street isn't ready to break out the bubbly, as IBM stock has fallen about 5% so far this year compared to the nearly 7% gain of the S&P 500 and the 10% gain of the NASDAQ Composite.
IBM will have a chance to prove the naysayers wrong and restore investor confidence when it reports the results of its just-completed 2018 third quarter after market close on October 16. Let's look at recent results to understand why investors are holding back and see what the future could hold.
Image source: IBM.
Growth returns -- with an asterisk...
For the second quarter of 2018, IBM reported revenue of $20 billion, an increase of 3.7% year over year, and net income of $2.4 billion that resulted in earnings per diluted share of $2.61, an increase of 5.2% compared to the prior-year quarter. The company saw revenue increases in each of its major business segments, though system sales saw the lion's share of growth, increasing nearly 25% year over year.
IBM's high growth initiatives -- which the company calls its strategic imperatives -- also produced respectable gains. These businesses, which include analytics, cloud computing, security, and mobile, grew to $10.1 billion, up 13% year over year, marking the first time the amalgamation of businesses produced more than half of IBM's total revenue.
While results like those aren't anything to write home about, they also don't seem to be cause for alarm, so what's got investors so apprehensive?
One of the biggest contributors to IBM's results last quarter was its legacy system sales, leaving investors fearful of what could happen when the refresh cycle of its mainframe business winds down. Another factor cited by the doubting Thomases is the contribution exchange rates have made to the positive results. In the first quarter, excluding the effect of the weak dollar, IBM's revenue was flat year over year. Ditto, in the fourth quarter of 2017, while IBM's sales grew 3.5%, they increased just 1% when adjusting for currency.
Looking ahead
IBM has steadfastly maintained its forecast for the year, saying it expects $13.80 in non-GAAP earnings per share, and GAAP diluted earnings per share of at least $11.60. The company said free cash flow should be approximately $12 billion for the year, with a realization rate greater than 100%. IBM also plans for its strategic imperatives to generate $40 billion in sales for the 12 months ending December 2018.
The company has produced three successive quarters of revenue growth, but investors remain unconvinced that the good times are here to stay. Maybe this quarter, IBM can finally but those lingering doubts to rest, but what's more likely is that the company will continue to creep forward with more of the same.
