IBM shares down as Q2 earnings fall short of expectations

Shares of International Business Machines Corporation (IBM) fell 3.9 per cent to $146.50 in trading before the official market opened today, after the company on Monday projected quarterly earnings of about $2.78 to $2.92 a share, compared with the $3.45 average analysts had estimated..

The shares had gained 0.5 per cent to $152.53 at Mondays close in New York.

IBM had forecast 38 to 39 per cent of the company's full-year earnings forecast of at least $13.50 per share will come in the first half. But that went awry after the technology leader of yester-years suffered 16 straight quarters of declining revenue.

IBM, however, said it continued to expect full-year 2016 operating (non-GAAP) diluted earnings per share of at least $13.50.

Monday's results, a 4.6 per cent decline in sales to $18.68 billion for the quarter, were just the latest in that trend that started in the second quarter of 2012.

However, IBM said revenue from its strategic imperatives of $29.8 billion over the last 12 months represented 37 per cent of IBM revenue.

IMB reported cloud revenue of $10.8 billion for the last 12 months. For cloud delivered as a service, annual run rate stood at $5.4 billion in the quarter, up 46 per cent adjusting for currency, up 42 per cent as reported year to year.

Free cash flow of $14.3 billion over last 12 months

IBM also announced or closed 10 acquisitions during the quarter and returned $2.2 billion to shareholders in the form of gross share repurchases and dividends.

"We are pleased with the progress we have made helping our clients apply new cognitive solutions and hybrid cloud platforms," said Ginni Rometty, IBM chairman, president and chief executive officer. "IBM has established itself as the industry leader in total cloud, analytics and cognitive, all of which helped drive our strategic imperatives revenue growth at a strong double-digit rate, substantially faster than the market."

"In the first quarter, we invested $3.6 billion in acquisitions and capital expenditures, and returned $2.2 billion to shareholders through dividends and gross share repurchases,'' said Martin Schroeter, IBM senior vice president and chief financial officer.  "We will continue to invest as we transform our operations, expanding our industry expertise and our cognitive and cloud capabilities."

The company generated free cash flow of $2.3 billion in the first quarter, excluding global financing receivables, up $1.2 billion year on year. IBM returned $1.2 billion in dividends and $0.9 billion of gross share repurchases to shareholders. At the end of March 2016, IBM had $4.7 billion remaining in the current share repurchase authorisation.

IBM ended the first-quarter 2016 with $14.9 billion of cash on hand, an increase of $6.7 billion since year-end 2015. Debt, including global financing debt of $26.8 billion, totaled $45.6 billion, compared with $39.9 billion at year-end 2015.  Core (non-global financing) debt totaled $18.8 billion, an increase of $6.1 billion since year-end 2015. The balance sheet remains strong and is well positioned to support the business over the long term, IBM said.

The decrease in the company's pre-tax income was primarily the result of increased expenses for workforce transformation, real estate actions, and actions in Latin America, which totaled nearly $1.5 billion.

The company expects full-year diluted earnings per share of at least $12.35.  The 2016 operating (non-GAAP) earnings expectation excludes $1.15 per share of charges for amortisation of purchased intangible assets, other acquisition-related charges and retirement-related charges.

IBM had previously expected a free cash flow realisation of GAAP net income, which implied a full-year free cash flow range of $11 billion to $12 billion.  The company now expects free cash flow to be at the high end of that range at the same base level of operating (non-GAAP) EPS.

The Armonk, New York-based company recently changed its reporting of business segments in an effort to better reflect chief executive Ginni Rometty's focus of moving toward cloud, analytics, social, mobile and security products and services.

While those newer operations, grouped under the umbrella of strategic imperatives, grew at double digits to $7 billion, it hasn't been enough to offset declines in International Business Machines Corp's legacy business.