IBM's Bottom Line Matters Now More Than Ever
While no one can dispute IBM is a well-run company, growth has not been "Big Blue's" strong suit, despite having spent over $16 billion the past five years in the effort.
Nevertheless, as investors lower their expectation, the stock has risen 75% over the past three years -- including 7% so far this year. Remarkably, this year's gains include fourth-quarter results that I would consider "so-so." Granted, margins arrived better than expected but the shares have already reached a level not expected until the second half of the year. IBM's name still carries weight.
IBM would make everyone's top 10 list of dominant tech names. While the balance sheet is nice, the company is getting left behind in several categories by much nimbler Salesforce.com (CRM) and cloud titan Oracle (ORCL) , which continues to strengthen its enterprise position after another recent acquisition .
Then again, not many rivals enjoy IBM's strong margins either. Where IBM falls short on growth, the company often makes it up where it matters the most - on the bottom line, including in the recent quarter with margins arriving at 48.1%. Likewise, gross margins advanced more than two points year over year.
For that matter, there were margin improvements in every segment, which is interesting for several reasons, not the least of which is IBM posted soft revenue of $29.09 billion representing a decline of almost 1% year over year.This was the third consecutive quarter of declining sales. But none of this mattered. Here's why.
Consider: As IBM has posted sales declines during the past three quarters, both Oracle and Salesforce.com have grown revenue during that span. For instance, compared to IBM's 3% software revenue growth, Oracle just ended its recent quarter with software licenses surging 17%. Likewise, Salesforce.com reported 34% increase in the same category. Essentially, IBM has been ceding market share to both companies.
But that's not all. While Salesforce.com posted a 35% year-over-year increase in service revenue, IBM posted a 2% decline in the same category. However, IBM still managed to report $5.8 billion in net income, or a 6% increase year over year. When excluding one-time items, earnings were $5.39, easily exceeding Street estimates of $5.25 per share.
This is where IBM's brilliance comes in. Despite the obvious market share loss during the quarter, the company still brings in tons of cash, all helped by its incredible margins. In other words, revenue growth is no longer the engine that drives the stock. This is what investors have come to appreciate. Profitability has taken over.