IBM fourth quarter net income at $4.5 bn as revenue falls to $21.8 bn

International Business Machines Corp (IBM) reported fourth quarter 2016 net income of $4.6 billion while its revenue for the quarter declined by 1 per cent to $21.8 billion. The company also reported a 1.7 per cent decline in margins to 50 per cent, indicating that revenue in cloud computing and artificial intelligence hasn't yet fully offset the cost of transition into new business model.

Revenue was $21.8 billion, slipping for the 19th consecutive quarter. Operating margins shrank year-on-year for the fifth quarter in a row, to 51 per cent, IBM said in a statement.

Total revenue from strategic imperatives, which includes all of IBM's newer operations, grew about 12 per cent to $9.5 billion in the quarter. For the full year, sales in these areas were $32.8 billion. IBM has set a goal of $40 billion in revenue from these businesses by 2018.

The company reported fourth-quarter profit, adjusting for some items, of $5.01 a share, beating the average analyst projection of $4.88. IBM's effective tax rate in the quarter was 9.5 per cent compared with 12.5 per cent a year earlier, which bolstered earnings.

IBM said fourth-quarter cloud revenues increased 33 per cent. The annual exit run rate for cloud as-a-service revenue increased to $8.6 billion from $5.3 billion at year-end 2015. Revenues from analytics increased 9 per cent. Revenues from mobile increased 16 per cent (up 17 per cent adjusting for currency) and revenues from security increased 7 per cent (up 8 per cent adjusting for currency).

For the full year, revenues from strategic imperatives increased 13 per cent (up 14 per cent adjusting for currency). Cloud revenues increased 35 per cent to $13.7 billion. The annual exit run rate for cloud as-a-service revenue increased 61 per cent (up 63 per cent adjusting for currency) year to year. Revenues from analytics increased 9 per cent. Revenues from mobile increased 34 per cent (up 35 per cent adjusting for currency) and from security increased 13 per cent (up 14 per cent adjusting for currency).

The company expects operating (non-GAAP) diluted earnings per share of at least $13.80 and GAAP diluted earnings per share of at least $11.95. Operating (non-GAAP) diluted earnings per share exclude $1.85 per share of charges for amortisation of purchased intangible assets, other acquisition-related charges and retirement-related charges. IBM expects a free cash flow realization rate in excess of 90 per cent of GAAP net income.

In the fourth quarter, the company generated net cash from operating activities of $3.2 billion; or $5.6 billion, excluding Global Financing receivables. IBM's free cash flow was $4.7 billion. IBM returned $1.3 billion in dividends and $0.9 billion of gross share repurchases to shareholders. At the end of December 2016, IBM had $5.1 billion remaining in the current share repurchase authorisation.

IBM generated full-year free cash flow of $11.6 billion, excluding Global Financing receivables. The company returned $8.8 billion to shareholders through $5.3 billion in dividends and $3.5 billion of gross share repurchases.

IBM ended the fourth-quarter 2016 with $8.5 billion of cash on hand. Debt, including Global Financing debt of $27.9 billion, totaled $42.2 billion. Core (non-Global Financing) debt totaled $14.3 billion. The balance sheet remains strong and is well positioned to support the business over the long term.

Chief financial officer Martin Schroeter attributed some of the narrower margins to ''heavy investment'' over the last few years in development, acquisitions and partnerships. IBM paid almost $6 billion to buy 15 companies last year and also boosted its spending on research and development. Currency also had an impact in the fourth quarter, he said on a conference call.

''After ramping investment in 2015 through late 2016, we've wrapped on that higher level,'' Schroeter said. Within the company's cognitive solutions segment specifically, ''those things that have dragged our margins down are starting to go away.''

IBM's shares fell as much as 3.3 per cent in extended trading after the earnings were announced. The stock closed little changed at $166.81 in New York.