IBM Margins Narrow While It Struggles to End Sales Slide

IBM Margins Narrow While It Struggles to End Sales Slide
Dražen Tomić

IBM fourth-quarter sales declined and margins narrowed, indicating that revenue in cloud computing and artificial intelligence hasn’t yet offset acquisition costs and other expenses to move the company into new businesses, according to Bloomberg.

Revenue was $21.8 billion, slipping for the 19th consecutive quarter. Operating margins shrank year-over-year for the fifth quarter in a row, to 51 percent, IBM said in a statement. Investors and analysts view the margin metric as a key indicator of the company’s health.

CFO 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.“

Since taking the helm in 2012, Chief Executive Officer Ginni Rometty has focused the company on products and services in newer technologies, including cloud computing, security, data analytics and artificial intelligence. In the meantime, older businesses such as computer operating systems hardware and software have eroded, and investors are waiting for the declines to be offset by growth in the newer operations.

IBM is also trying to sell more products as services, where customers pay as they use the tools instead of agreeing to large multiyear contracts. This approach hasn’t gained enough traction to generate the high margins that IBM and analysts hope for over the long-term.

Some areas have started to show promise. Sales in cognitive solutions, which houses analytics and AI software, increased for the third quarter in a row, and the technology services and cloud platforms segment also recorded year-over-year growth.

Total revenue from strategic imperatives, which includes all of IBM’s newer operations, grew about 12 percent 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 percent compared with 12.5 percent a year earlier, which bolstered earnings.