IBM: Things Are Changing

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IBM: Things Are Changing

seekingalpha2021-04-28

Summary IBM reported its first revenue growth (excluding currency effects) in four quarters as its hybrid cloud effort grows. The company is improving capital allocation by deleveraging and has ...

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Peanutschez
·2021-04-28
Wow
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Rnglord
·2021-04-28
Like and share
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Mansoor
·2021-04-28
I see
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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nIBM: Things Are Changing\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-28 15:43 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4421480-ibm-stock-things-are-changing><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Summary\n\nIBM reported its first revenue growth (excluding currency effects) in four quarters as its hybrid cloud effort grows.\nThe company is improving capital allocation by deleveraging and has ...</p>\n\n<a href=\"https://seekingalpha.com/article/4421480-ibm-stock-things-are-changing\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IBM","symbol_name":"IBM","start_time":0,"source_url":"https://seekingalpha.com/article/4421480-ibm-stock-things-are-changing","article_id":"1173867072","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=1173867072","pubTimestamp":1619595824,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Summary\n\nIBM reported its first revenue growth (excluding currency effects) in four quarters as its ","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"IBM":"IBM"},"translate_title":"IBM：事情正在发生变化","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"IBM":0.9},"content_text":"Summary\n\nIBM reported its first revenue growth (excluding currency effects) in four quarters as its hybrid cloud effort grows.\nThe company is improving capital allocation by deleveraging and has stated that they are committed to the dividend.\nThe dividend is safe, and IBM has paid a consecutive dividend for 100+ years, and the company is also a Dividend Aristocrat.\nThe divestment of Kyndryl should improve companywide pre-tax profit margins.\nThe yield is still more than double that of the average for the S&P 500.\n\nPhoto by JHVEPhoto/iStock Editorial via Getty Images\nI have written positively about International Business Machines (NYSE:IBM) for some time on Seeking Alpha. In fact, I even included IBM in my Top 3 Dividend Growth Stocks for 2021. There are some readers who questioned my positive call. They rightly pointed out past mistakes by IBM, poor management, too much debt, debt-fueled share buybacks, and so on. There was even criticism of the acquisition of RedHat and the price that was paid.\nHowever, that was the past and things are changing for IBM. The most recent earnings release was the first growth in revenue (not accounting for currency effects) after four straight quarters of declines. In general, the latest quarter was much more positive as earnings per share was above consensus. Gross margins improved 120 bps. Three operating segments reported sales growth. Granted, IBM is still work in progress but seemingly IBM has hit an inflection point. It must still be determined if IBM can generate momentum and sustained growth with their hybrid cloud strategy in face of strong competition. However, I discuss below the reasons why I think IBM is long term buy.\nHybrid Cloud Is Gaining Traction\nOne of the major criticisms about IBM in the past decade was declining revenue and management’s inability to turn that around. For context, total revenue was $104,784 million in 2011 and $72,488 million in 2020. Simultaneously, operating income and net profit declined as well. Some of this was due to divestments of the hardware divisions. But in general IBM was not able to stop the trend of declining revenue as the nature of Information Technology changed with the growth of the cloud. IBM had cloud offerings but was seemingly focused on Watson and Cognitive applications. An interesting historical footnote was that Watson won on Jeopardy in early-2011 approximately when total revenue peaked.\nSource: TIKR.com\nIBM pursued a change in strategy by acquiring RedHat in 2019 for $34 billion. It was an expensive acquisition, but seemingly it has reinvigorated IBM’s products and gave IBM a stronger foothold in hybrid cloud. IBM now has approximately 3,000 hybrid cloud platform clients. Cloud revenue grew 18% year-over-year resulting from a 34% increase in cloud and cognitive software revenue and a 28% increase in cloud revenue in Global Business Services. Cloud revenue was $6.5 billion in Q1 2021 out of $17.7 billion total revenue or nearly 37%. IBM’s cloud revenue continues to grow. For the LTM, cloud revenue was $27.7 billion, which is about one-third of total revenue. A decent part of that is RedHat revenue, which continues to grow in the high teens. When IBM bought RedHat it had $3.4 billion in revenue. IBM does not report RedHat’s revenue separately but it is likely based on 15% to 20% annual growth since the acquisition that RedHat’s revenue roughly $4 billion or more\nThe real question though, will IBM’s cloud revenue continue to grow? Some analysts are skeptical of IBM’s ability to generate revenue growth in CY22. But realistically cloud applications and software are growing, and hybrid cloud will be a part of that. IBM outlines its strategy with this platform approach in the chart below. IBM can provide services, software, hybrid cloud, and infrastructure. Not too many of its competitors can do that.\nSource: IBM 1Q 2021 Earnings Presentation\nClearly though IBM must execute on its strategy of getting existing clients to adapt hybrid cloud products and on this front IBM seems to be at least starting to deliver. IBM reported ~3,000 clients to date. IBM must also expand its software partners in this area and gain new clients. IBM has recently partnered with Palantir (PLTR) and other organizations. If IBM’s hybrid cloud platform is to be successful, then its partners must help drive adoption. IBM must also deliver on innovation. IBM is prolific in generating patents, and the company had the most patents in 2020 and has maintained leadership in patents issued for 28 consecutive years. But IBM must translate those patents and other product developments to the marketplace to drive revenue growth.\nIBM Has New Management\nOne the main criticisms by small investors about IBM was the prior CEO and management. Today, IBM has a new CEO, Arvind Krishna. Krishna has been longtime IBM employee and was the company’s senior vice president of cloud and cognitive software before becoming the CEO. He has seemingly moved decisively to transform IBM into a hybrid cloud provider. After the acquisition of RedHat, the major move by Krishna has been to divest Kyndryl that will contain most of the Managed Infrastructure Services business from the Global Technology Service segment. This will remove what is arguably a drag on top line and bottom line growth. In the most recent quarter revenue declined another (5%) continuing the trend for the past two years.\nIBM also has a new President, James Whitehurst. Whitehurst was CEO of RedHat for 12 years and is thus an outsider. He was also the COO of Delta before that and helped the airline recover during its bankruptcy. The important thing is that Whitehurst was successful at RedHat and drove its growth. In 2008, full year revenue was about $523 million and by 2019 total revenue was $3.4 billion. Furthermore, many of the RedHat leadership team is still in place after the acquisition by IBM. I view it as unlikely that RedHat’s growth will slow down too much under IBM at least in the near future despite some analyst misgivings.\nIBM’s Capital Allocation is Improving\nIBM’s capital allocation is improving, which I attribute to current management. Since the RedHat acquisition there has been no debt-fueled share buybacks. Instead, IBM is focused on reducing debt and leverage, conducting bolt-on acquisitions in the cloud space, and the dividend (more on that below).\nFor debt, the Q1 2020 earnings release indicated that IBM reduced total debt by $5 billion. At end of March 2021, cash, cash equivalents, and marketable securities were $11.3 billion. However, core debt was down to $38.1 billion giving net debt of $26.8 billion. For perspective, core debt was $48 billion before closing on the RedHat acquisition in Q2 2019. Global Financing debt is down as well to $18.3 billion at end of March 2021. This debt was $25 billion before completion of the RedHat acquisition. IBM is slowly winding down Global Financing.\nDeleveraging is reducing interest payments. Before the RedHat acquisition interest expense was roughly $200 million. It went to $432 million in the quarter after the acquisition and is now down to $280 million in Q1 2021. However, it is not clear what IBM’s target is for leverage ratio. The leverage ratio peaked at ~3.1X and is now down to 2.7X in the TTM. I would like to see this come down to below 2.5X by end of 2021 and below 2X by end of 2022. Simultaneously, interest coverage was reduced to about 6.6X but is now ~7.7X in the TTM. I would like to see this come up to over 10X.\nKyndryl Divestment Should Be a Positive\nIBM has named its Managed Infrastructure Services spinout Kyndryl and is slowly filling the management team. Kyndryl will have about $19 billion in revenue and the separation should be completed by end of CY 2021. Of the four operating segments, Global Technology Services has the second lowest pre-tax income margin at 2.1% in the most recent quarter. The chart below shows the pre-tax income margins for the past several quarters. It is clear that Cloud & Cognitive Services generates the highest pre-tax margins followed by Global Business Services. On the other hand, pre-tax margins at Global Technology Services are lower than these two segments. Systems margins are cyclical probably reflecting product cycles.\nSource: IBM Earnings Releases and Presentations\nGlobal Technology Services had revenue of about $25.8 billion in 2020. Of this, Infrastructure & Cloud Services had revenue $19.7 billion, and Technology Support Services had revenue of $6.1 billion. This segment had declining revenue in 2019 and 2020. In addition, with low pre-tax margins it is not surprising that IBM desires to spin out the business.\nHowever, Global Technology Services is the largest business segment but once Kyndryl is spun out, the largest business segment will be Cloud & Cognitive Software. This segment also has the highest pre-tax margin business and revenue is growing. The net effect of the Kyndryl spinoff will be a positive for IBM as the largest remaining business segment is focused on software and hybrid cloud should be able to grow at a sustained mid-single digit rate. The second largest remaining segment, Global Business Services, should be able to at least maintain revenue. While the smallest remaining segment, Systems representing only $7 billion in revenue in 2020, would be cyclical depending on product cycles.\nIBM’s Dividend and Safety\nIBM was a deal when the yield was over 5% and certainly over 6%. IBM’s dividend is now near its trailing 5-year average but that is still above 4.5%. The yield is more than double that of the average for the S&P 500. It is also more than many utilities.\nSource: Portfolio Insight\nA few authors on SA and elsewhere have commented on the safety of IBM’s revenue. Their argument is that earnings per share and free cash flow do not support the current dividend. I think it unlikely that the dividend is cut based on earnings and free cash flow.\nThe forward dividend is $6.52 and consensus 2021 earnings per share is $10.93. This gives a payout ratio of about 60%. Granted, this value can be lower, but it is still below my threshold of 65%.\nIn the LTM, operating cash was $18,635 million. Capital expenditures were $2,410 million giving free cash flow of $16,225 million. The dividend required $5,814 million. This gives a dividend-to-FCF ratio of 35.8%. This is a solid value and well below my criterion of 70%.\nFurthermore, IBM is one of only 18 companies to have paid a dividend consecutively for 100+ years. IBM started to pay a dividend in 1916. IBM is also a Dividend Aristocrat having raised the dividend for 26 years. I view it as very unlikely that IBM will let either streak end. Indeed, in the most recent earnings release slides,the CFO stated,\n\n In the first quarter we continued to improve the fundamentals of our business model. With strong cash generation and disciplined financial management, we increased investments in our hybrid cloud and AI capabilities, while significantly deleveraging in the quarter and supporting our commitment to a secure and growing dividend.\n\nHence, IBM is certainly focused on maintaining and growing the dividend.\nFinal Thoughts on IBM\nIBM is still work in progress. There are investors and analysts who doubt the company’s ability to generate consistent top line growth. That said, the company’s new strategy is seemingly moving in the right direction. The stock is trading near its 52-week high after hitting 10-year lows in during 2020 and the COVID-19 pandemic but the dividend yield is still high relative to the S&P 500. I continue to view IBM as a long term buy.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":100810239,"gmtCreate":1619598441221,"gmtModify":1704726560092,"author":{"id":"3566370712497974","authorId":"3566370712497974","authorIdStr":"3566370712497974","name":"Peanutschez","avatar":"https://static.tigerbbs.com/2d70c19af05c37b08df1881c97681749","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3566370712497974"},"htmlText":"Wow","listText":"Wow","text":"Wow","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/100810239","repostId":1173867072,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":100804324,"gmtCreate":1619596861068,"gmtModify":1704726528581,"author":{"id":"3577160593057225","authorId":"3577160593057225","authorIdStr":"3577160593057225","name":"Rnglord","avatar":"https://static.tigerbbs.com/5c403a0704a8859f4b98f1d156960d31","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3577160593057225"},"htmlText":"Like and share","listText":"Like and share","text":"Like and share","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/100804324","repostId":1173867072,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":100808224,"gmtCreate":1619596576868,"gmtModify":1704726523990,"author":{"id":"3581640037486643","authorId":"3581640037486643","authorIdStr":"3581640037486643","name":"Mansoor","avatar":"https://static.tigerbbs.com/27a82f07d97fa74f895558c31a20fd95","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"3581640037486643"},"htmlText":"I see","listText":"I see","text":"I see","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/100808224","repostId":1173867072,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":7,"commentSize":3,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}