Summary
- Company beats on top and bottom line.
- Strong revenues reported across all segments.
- CEO change may bring turn in investor sentiment.
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:
