IBM shares jumped as much as 7% in extended trading but later lost most of their gains Monday after the software and services company said revenue climbed 6% in the fourth quarter, surpassing expectations.
Here’s how the company did:
- Earnings: $3.35 per share, adjusted, vs. $3.30 per share as expected by analysts, according to Refinitiv.
- Revenue: $16.70 billion, vs. $15.96 billion, vs. as expected by analysts, according to Refinitiv.
During the period, IBM spun out is managed infrastructure services business into Kyndryl. For IBM’s continuing operations, revenue rose 6% from a year earlier, the company said a statement. Part of the growth comes from sales to Kyndryl.
IBM executives have been telling investors of late to look for mid-single digit revenue growth. In the prior quarter, IBM’s revenue from continuing operations increased by 2%. The company showed its fastest revenue growth since the third quarter of 2011.
Net income in the fourth quarter jumped 72% from a year earlier to $2.33 billion increased, while gross margin narrowed to 56.9% from 58.9%.
Arvind Krishna, IBM’s CEO, reiterated the mid-single-digit growth goal on a conference call with analysts and said to expect between $10 billion and $10.5 billion in free cash flow for 2022.
It will take a few quarters for IBM’s profit to reflect higher labor costs, said Jim Kavanaugh, the company’s finance chief.
The technology industry as a whole faces a shortage of people with the right skills, Krishna said.
“I’ll use the word demographics on the skill shortage that is endemic in technology now,” he said. And that is sort of playing in. By the way, I don’t believe that the skill shortage is because of COVID. I do believe COVID may have exacerbated or created a pull-in of those demographics, but those I think are going to last us for the decade.”
IBM streamlined its reporting segments for the fourth quarter in conjunction with the Kyndryl separation. Its software business, formerly known as Cloud and Cognitive Software, generated $7.27 billion in revenue, up 8% from a year earlier and above the $6.72 billion consensus among analysts polled by StreetAccount.
Revenue in the consulting unit, previously named Global Business Services, rose 13% to $4.75 billion, more than the $4.20 billion StreetAccount consensus. The IBM infrastructure business, which includes hardware, was down 0.3% to $4.41 billion and slightly lower than the $4.43 billion consensus. A new mainframe computer cycle will start late in the first half of the year, Kavanaugh said.
As of the close on Monday, IBM shares are down 4% since the start of the year, while the S&P 500 is down 8%.
“M&A has to have an economic benefit for our company and our shareholders,” Krishna said. “As valuations come down, clearly some targets may become more approachable that were not previously approachable. And as I said before, look, we have a little over $20 billion of flexibility over the next three years. So I’d just leave it at that. That’s our total flexibility. As prices come down, certainly more things come within range.”
In addition to completing the Kyndryl transaction, IBM announced during the period the acquisitions of Australian cloud consulting company SXiQ and a consulting unit that handles Adobe implementations. It also announced a vertical semiconductor transistor architecture alongside Samsung.
Kyndryl generated $4.6 billion in revenue in the third quarter, with over 4,000 customers and around 90,000 employees, according to an a regulatory filing.