Shares of IBM (NYSE:IBM) have slipped 16% over the past year, due to concerns about its lack of top- and bottom-line growth. In previous articles, I discussed Big Blue's core strengths and weaknesses. Today, I'll highlight five recent statements from IBM's management, and what they tell us about the company's future.
1. Growth in "strategic imperatives"
IBM's top line has declined for 11 consecutive quarters. However, the company wants investors to pay attention to its five growing businesses -- its cloud, data analytics, mobile, social, and security efforts -- which it calls "strategic imperatives." Together, revenue at those segments has risen 19% to 20% annually over the past five years.
Speaking at Morgan Stanley's Technology, Media, and Telecom Conference in early March, CFO Martin Schroeter stated: "Our strategic imperatives continue to drive strong growth, up 16% in 2014, and that includes an impact from currency. Together, cloud, analytics, mobile, social, and security generated $25 billion in revenue, which is 27% of IBM."
During IBM's fourth-quarter earnings call, Schroeter said revenue from those segments "will grow to $40 billion" by 2018, which would represent 44% of expected companywide revenue. To ensure that growth stays on track, IBM intends to invest $4 billion in those businesses throughout 2015.
2. Cloud growth is exceeding expectations
In 2014, IBM reported that total cloud revenue rose 60% year over year to $7 billion, but that only represented 7.5% of its top line. However, according to IBM, that growth has topped management's expectations.
"When we started talking about the size of our cloud business a few years ago, we said by 2015 --- by the end of this year -- we will do about $7 billion in cloud, and off that, about $3 billion would be net growth to IBM. Now we have hit $7 (billion) a year early," Schroeter said during the Morgan Stanley conference.
The $3 billion figure Schroeter cited is revenue generated by IBM's high-margin "cloud delivered as a service" businesses, which include Bluemix, its cloud as a service platform for enterprise, its cloud apps partnership with Apple, and Watson, IBM's AI platform.
3. How to monetize Watson
Speaking of Watson, CEO Ginni Rometty believes the platform can generate $1 billion in annual revenue by 2018 and $10 billion annually within 10 years. That's why IBM invested $1 billion to launch a new business unit for Watson in January 2014.
At that time, Watson had only accumulated roughly $100 million in lifetime revenue. During the Morgan Stanley conference, Schroeter discussed how IBM could monetize Watson:
We're a $17 billion analytics business. Watson is not a substantial contributor. So we see Watson as part of what maintains our lead in analytics and what drives growth going forward. We will monetize Watson really in three ways.
Those "three ways" encompass deploying Watson for customized applications such as healthcare, automated applications such as call centers and financial services, and creating an app ecosystem to attract software developers. Those efforts have already attracted major clients including Anthem and Citigroup.
4. Fewer stock buybacks
IBM is frequently criticized for using big stock buybacks, financed by debt, to help its earnings per share meet Wall Street estimates. Over the past 12 months, IBM repurchased nearly $13 billion in stock, compared to $4.3 billion spent on dividends. During that time, the company had a free cash flow of just $12.7 billion. During the fourth-quarter earnings call, Schroeter talked about reducing buybacks:
Since the beginning of our share repurchase program in 1995, we've taken our share count from roughly 2.35 billion shares to fewer than 1 billion shares. That's a reduction of 58% program-to-date at an average purchase price of less than $100 per share. At the end of the year, we had $6.3 billion remaining in our buyback authorization.
That remaining $6.3 billion is less than half of what IBM spent in 2014 on buybacks, and will represent the fewest shares repurchased in 11 years. That makes sense for three reasons. First, interest rates will likely rise this year, which would make it more expensive to finance buybacks with debt. Second, it could let IBM increase its dividend, which could attract more income investors. Lastly, it would let IBM focus on growing its bottom line naturally, rather than with buybacks.
5. A rising dollar will hurt IBM's earnings
During the fourth-quarter earnings call, Schroeter acknowledged that a rising U.S. dollar would adversely impact IBM, which generates most of its revenue abroad:
The dramatic dollar strengthening started in September and has continued at a rapid pace. In addition, the currencies have nearly all moved in an unfavorable direction for our business profile. The result is an impact to our revenue and our earnings.
Schroeter noted that IBM hedges a "portion" of its cross-border cash flow, which "defers the impact of the currency movement" but doesn't eliminate it. Therefore, if the U.S. dollar remains strong -- which is a likely scenario with quantitative easing efforts under way in Asia and Europe -- IBM's earnings will remain under pressure.
The key takeaways
Those five statements paint a picture of a company in transition. After divesting its lower-margin businesses and slashing jobs, IBM is trying to increase revenue and earnings again with bigger investments in higher-growth businesses. It will certainly be an uphill battle -- especially with the strong dollar eating up foreign revenue -- but it could pay off in the long term.