After the bell on Monday, we received second quarter results from technology and service giant IBM (IBM). Expectations were not that high as you might expect, given both the coronavirus situation as well as the company’s recent negative reporting history. However, IBM announced a double beat that sent shares nicely higher in the after hours session.

For Q2, the company came in with revenues of more than $18.1 billion, beating street estimates by about $400 million. Of course, I must remind everyone that just six months ago, the street was looking for $19.8 billion, so estimates did come down quite meaningfully. Overall, revenues were down 5.4% over the prior year period, or 1.9% when adjusting for currencies and divested businesses. Below, I’ve detailed how each of the segments did as compared to their individual expectations. As a point of reference, individual segment estimates may not add up to the overall street total, depending on how many analysts submitted these extra figures, and because there was no estimate provided for Global Financing.

  • Cloud & Cognitive Software revenues of $5.7 billion, up 3 percent (up 5 percent adjusting for currency), with growth in Cloud & Data Platforms, up 29 percent (up 30 percent adjusting for currency) led by Red Hat. Street was looking for $5.38 billion.
  • Global Business Services revenues of $3.9 billion, down 7 percent (down 6 percent adjusting for currency). Cloud revenue up 12 percent (up 13 percent adjusting for currency). Street was looking for $3.72 billion.
  • Global Technology Services revenues of $6.3 billion, down 8 percent (down 5 percent adjusting for currency). Cloud revenue up 18 percent (up 20 percent adjusting for currency). Street was looking for $6.2 billion.
  • Systems revenues of $1.9 billion, up 6 percent, led by IBM Z, up 69 percent (up 68 percent adjusting for currency). Cloud revenue up 22 percent. Street was looking for $1.6 billion.

These were nice beats across the board, and the growth is focused on IBM’s cloud-based future. That was a major reason for the CEO change announced earlier this year, and the company’s new leader was in charge for almost all of Q2. This happened to be the largest revenue beat since Q4 2017, and the best top/bottom line combined beats in my opinion since Q1 2016. Remember, IBM had missed on the top line in six of the past seven quarters.

The revenue beat certainly helped the income statement, but so did margins. Overall, gross margins came in at 48%, up one percentage point from a year earlier, and beating street estimates for 47%. Business Services, Systems and Global Financing saw nice margin improvement over the prior year period. Cloud and Cognitive Software margins did decline by 60 bps, but this segment’s revenue was a larger part of total revenues than Q2 2019 and it is the highest margin segment. In the end, non-GAAP EPS of $2.18 beat street estimates by almost a dime per share.

In the second quarter, the company generated net cash from operating activities of $3.6 billion, or $3.0 billion excluding Global Financing receivables. IBM’s free cash flow was $2.3 billion, while the company returned $1.5 billion to shareholders in dividends. Here’s how the company’s cash and debt figures compare against Q1 2020:

IBM ended the first quarter with $12.0 billion of cash on hand which includes marketable securities. Debt, including Global Financing debt of $22.3 billion, totaled $64.3 billion.

IBM ended the second quarter with $14.3 billion of cash on hand which includes marketable securities, up $5.2 billion from year-end 2019. Debt, including Global Financing debt of $21.9 billion, totaled $64.7 billion.

IBM continues to work on its net debt position as we move further away from the large Red Hat acquisition. With the company still producing tremendous free cash flow, $11.5 billion in the past trailing 12 months, I was a little disappointed a few months back with the meager dividend raise. I understand that the pandemic had something to do with this, but with no buyback, you would have thought the dividend could have been raised a little more. At the moment, the company is focusing a little more on balance sheet improvement and financial flexibility.

In the end, IBM announced a solid quarter, coming in a lot better than the street had feared. There were impressive revenue numbers across all business segments, and better than expected margins helped fuel a large bottom line beat. Cash flow remains strong, with the company looking to improve its financial flexibility. Shares jumped more than 6% in the after-hours session, and are now above the 200-day moving average seen in the chart below (green line). This should get its shorter term trend line (in purple) moving higher again, which could lead to a golden cross and perhaps some technical buying in the short term. Investors certainly liked the results under the new CEO, and will now hope this is a sign of things to come rather than just a one quarter wonder.

(Source: Yahoo Finance)

 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

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2020-07-20