It's been a rough ride for shareholders of International Business Machines (NYSE:IBM). The stock has been tumbling for the past few years, revenue and profits have been shrinking, and disruptive technologies and competitors appear to be eating away at the company's once-impenetrable economic moat.
But all is not lost for IBM. The company's transformation, while occurring more slowly than investors would like, is progressing, and IBM remains a wildly profitable company returning billions of dollars to shareholders each year. Going forward, here are three numbers that are important for investors to know.
Following IBM's fourth-quarter earnings report, the company has now reported year-over-year declines in revenue for 15 straight quarters. In 2015, the company generated just $81.7 billion of revenue, compared to nearly $107 billion in 2011. It's easy to look at this decline and balk at the idea of investing in IBM, but the details are important.
Much of IBM's revenue declines in recent quarters have had little to do with the operational performance of the business itself. Currency has been ravaging IBM's results, with a strong dollar driving down international revenue. During 2015, while reported revenue slumped 12%, revenue adjusted for both currency and businesses that IBM has divested fell by just 1%. That's not a stellar performance, but it's far from a disaster.
Here's how IBM's quarterly revenue growth has evolved over the past few years, both as reported and adjusted for currency and divestitures:
While revenue declines are never a good thing, it's clear from this chart that IBM's revenue woes are far less severe than the reported numbers suggest. IBM is in the middle of a dramatic transformation, shifting resources away from legacy businesses into areas like analytics and cloud, and while a return to growth may still be years away, revenue is holding up a lot better than the reported figures suggest.
Speaking of a dramatic transformation, IBM's strategic imperatives, which include analytics, cloud, security, mobile, and social, accounted for 35% of the company's total revenue during 2015, with the businesses collectively growing by 26% on an adjusted basis. Business analytics generated $17.9 billion of revenue, up 16%, cloud generated $10.2 billion of revenue, up 57%, and mobile revenue more than tripled.
The rest of IBM is shrinking as the company shifts resources toward these high-growth areas, so overall, revenue is declining. But over time, IBM expects to return to low-single-digit annual revenue growth, and the shift toward these strategic imperatives is expected to allow the company to grow pre-tax income at a faster mid-single-digit rate. Factoring in share buybacks, IBM expects high-single-digit EPS growth in the long run.
Hitting these long-term growth targets will take time, and investors will need to continue to be patient as IBM transforms its business. There's a real risk the company will fail; Warren Buffett stated in an interview on CNBC that he still believes buying IBM was the right decision, but that it could turn out to be a mistake. IBM has gone through major transformations before, but there's no guarantee the company will succeed this time.
One area IBM is increasingly focusing on is healthcare. CEO Ginni Rometty has called healthcare IBM's "biggest moonshot," and the size of the opportunity is vast. The global healthcare market is measured in the trillions of dollars, and the healthcare analytics market alone is expected to grow to $18.7 billion by 2020, up from just $5.8 billion in 2015, according to MarketsandMarkets.
IBM has made some major healthcare acquisitions, including the $2.6 billion purchase of Truven Health Analytics earlier this month, and the $1 billion purchase of medical image handling and processing company Merge Healthcare last year. Watson Health, IBM's business unit dedicated to using its Watson cognitive computing system in the healthcare industry, has forged various partnerships, with organizations like the American Heart Association and with companies like Under Armour, in order to apply Watson to various healthcare applications. At the Memorial Sloan Kettering Cancer Center, for example, Watson is being trained in an effort to provide personalized treatment plans for cancer patients, with the goal of improving patient outcomes.
If IBM can succeed in embedding Watson in the healthcare industry, making the technology indispensable and providing value by both lowering costs and improving patient outcomes, the company could have a major new source of revenue on its hands in the coming years.