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Analyzing IBM’s Operating Margin Trend

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IBM’s margin trends

IBM (IBM) has witnessed a double-digit operating margin trend in the last five quarters. During this period, IBM maintained an average operating margin of nearly 17% each quarter. The company’s operating profit in the second quarter was $3.4 billion—up 11% YoY (year-over-year). The operating margin for the same quarter was 16.9%—compared to 15.9% in the first quarter of 2017. In the following graph, you can see IBM’s operating margin trend in the last five quarters.

IBM’s Cognitive Solutions segment continues to drive the company’s overall operating margin. The segment produced the highest operating margin of 33.2% in the reported quarter due to the growing adoption of high margin products like blockchain, AI, and IoT (Internet of Things).

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Margin headwinds and tailwinds

Winning large cloud contracts outside the US, which includes the $740 million deal from the Australian government in July and the $500 million contract from Italy’s leading bank Banca Carige, might continue to act as a strong catalyst for IBM’s margin in the upcoming quarter.

IBM might gain from a better mix of products in different segments. The company’s policy to upsell bundled products to its clients might contribute to margin expansion. IBM’s strategy to optimize the workforce could also add to its margin growth.

However, the company’s rising R&D (research and development) and SG&A (selling, general, and administrative) expenses could suppress the margin growth going forward. In the second quarter, both of these expenses on a combined basis stood at $6.1 billion—down 3.9% YoY. The expenses declined at a CAGR (compound annual growth rate) of 1%. During the same period, Microsoft’s (MSFT) R&D and SG&A expenses on a combined basis grew at a CAGR of 2.6%.

The stronger US dollar might impact IBM’s margin growth in the upcoming quarter. The company’s international business contributes more than half of the total revenues.

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