IBM Earnings Hint at Signs of Turnaround -- 2nd Update

By Asa Fitch

International Business Machines Corp. reported a slight increase in quarterly revenue, ending a streak of falling sales and providing a first indication Chief Executive Ginni Rometty's roughly $33 billion acquisition of open-source software giant Red Hat may help turn around Big Blue's fortunes.

The company on Tuesday said fourth-quarter revenue rose 0.1% to $21.78 billion after five straight quarters of year-over-year declines.

Adjusted earnings per share fell around 3% to $4.71 but came in ahead of expectations of analysts surveyed by FactSet. Adjusted net income fell by about 5% to $4.2 billion, IBM said.

Boosting IBM sales has been a difficult task for Ms. Rometty since she took over in 2012 as CEO of the iconic tech company. Quarterly sales slid throughout her first several years as customers changed their IT spending priorities and IBM was slow to respond. IBM briefly halted that slide in 2017 and 2018, only for quarterly revenue to fall again.

IBM was slow to embrace the cloud-computing model where customers rent computing horsepower rather than buy and pay to maintain the equipment. But cloud computing took off over the past decade, delivering strong earnings growth for market leaders Amazon.com Inc. and Microsoft Corp.

Buying Red Hat, IBM's biggest acquisition in its 108 years, represents a big bet for Ms. Rometty to finally deliver lasting top-line growth. Red Hat sells support for open-source software that IBM expects more companies will use as they crunch more of their data in the cloud. Ms. Rometty said Red Hat would help IBM be a leader as that market evolves to the so-called hybrid cloud, where companies mix on-site storage and rented server capacity.

IBM said the fourth quarter was its strongest yet in the cloud, with 21% growth to $6.8 billion of sales. Amazon and Microsoft still post higher growth rates in this market, though companies differ in what cloud services they offer and how they calculate those sales.

IBM also issued an upbeat outlook across its businesses for the current year. Adjusted earnings per share for this year should be at least $13.35, up from $12.81 in 2019, the company said, and above what analysts forecast.

IBM shares rose 3.5% in aftermarket trading.

IBM doesn't provide revenue guidance, but Ms. Rometty said sales should continue on an upward trajectory. "This positions us for sustained revenue growth in 2020," she said.

IBM is expected to get a boost this year from a new generation of mainframe computers introduced late last year and from Red Hat, where adjusted revenue grew by 24% in the quarter. IBM finalized its purchase of Red Hat, which sells open-source software support and training services, in July.

James Kavanaugh, IBM's chief financial officer, said the combination with Red Hat is already paying dividends. Red Hat signed 21 deals worth more than $10 million in the fourth quarter, he said, doubling the total for the previous quarter.

The gains for IBM from the addition of Red Hat haven't yet fully hit the bottom line. IBM can't immediately count all of Red Hat's deferred revenue as its own sales under accounting rules, while the company has to reflect all costs it has taken on.

The systems segment, which includes sales of the new mainframe computers, delivered $3 billion in sales, a 16% increase compared with the prior year.

Some of IBM's legacy businesses continued to struggle, though. The technology-services segment, which includes tech support and outsourcing services, saw a 4.8% fall in revenue to about $6.9 billion.

Mr. Kavanaugh said IBM was reorganizing that segment to make it more cost-competitive. He didn't specify specific actions the company would take to lower costs.

"We're going to take aggressive structural actions to reposition the business overall," he said.

Write to Asa Fitch at asa.fitch@wsj.com

(END) Dow Jones Newswires

January 21, 2020 19:34 ET (00:34 GMT)

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