The Overlooked Facts from IBM’s 2Q17 Report
Top line continues to deteriorate
IBM (IBM) stock fell to a new one-year low on the day after its 2Q17 earnings report. The dip in the stock came about because investors disliked what they heard from the report.
IBM’s revenue in 2Q17 fell 5.0% year-over-year to $19.3 billion and also missed consensus estimates by $160 million. The top line missed estimates by $230.0 million in the previous quarter. The company posted adjusted operating EPS (earnings per share) of $2.97. Analysts were looking for EPS of $2.74.
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An unusual EPS boost
At first glance, the above scorecard implies that IBM missed revenue expectations but surpassed EPS expectations by a considerable margin. That is true to an extent. A closer analysis of IBM’s 2Q17 report tells a slightly different story. The $2.97 in EPS that IBM reported came courtesy of tax benefits, which boosted the bottom-line figure by $0.18. Tax benefits do not come all the time.
Gross margin shrinks
It is not just top-line growth that is concerning for IBM. The company is also struggling to maintain its bottom line. IBM’s gross profit margin sank to 45.6% in 2Q17, down from 47.9% in the same period a year earlier. Gross margin for 1H17 also fell to 44.2% compared to 47.2% in 1H16.
Commenting on the gross margins story, IBM’s CFO, Martin Schroeter, said in an interview cited by Bloomberg that the metric should register sequential improvement in 2H17.
However, despite competitive pressures from Amazon (AMZN), Microsoft (MSFT), Oracle (ORCL), and Alphabet’s (GOOGL) Google, IBM’s Strategic Imperatives (or SI) continue to grow and contribute more to the top line. SI sales rose 11% year-over-year and accounted for 43% of revenue for the trailing 12 months as shown in the above chart.