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Shares of International Business Machines Corp.

IBM dropped over 3.8% in after-hours trading yesterday. The company reported mixed fourth quarter 2015 results. However, it provided a weak outlook for 2016, which negatively impacted investors’ sentiments.

IBM posted non-GAAP earnings of $4.84 per share in the quarter, beating the Zacks Consensus Estimate of $4.76 but declining approximately 17% on a year-over-year basis.

IBM Corporation (IBM) Street EPS & Surprise Percent – Last 5 Quarters | FindTheCompany

Quarterly revenues of $22.1 billion fell slightly short of the Zacks Consensus Estimate of $22.2 billion while declining about 8.3% on a year-over-year basis.

The company reported decline across all its segments, excluding cloud, analytics and engagement businesses, which showed improvement.

Segment Details

Global Technology Services (GTS) revenues declined 7% year over year to $8.1 billion. Global Business Services revenues declined 10% to $4.3 billion. IBM’s services backlog at the end of the quarter stood at $121 billion, up 1% on a constant currency basis.

Revenues from the Software segment were $6.8 billion, down 11% from the year-ago quarter. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were down 10% from the year-ago quarter to $4.9 billion. Operating systems revenues declined 12% from the prior-year quarter to $0.5 billion.

Systems Hardware segment revenues were down 1% on a year-over-year basis to $2.4 billion. Revenues from System z mainframe server products increased 16% on a year-over-year basis. Power Systems increased 4% year over year. However, revenues from System Storage went down 11% year over year.

Global Financing revenues declined 15% on a year-over-year basis to $0.5 billion.

The company’s strategic initiatives (cloud, analytics and engagement) revenues in the quarter increased 10% on a year-over-year basis. The growth was 16% on a constant currency basis. For full year 2015, revenues from strategic initiatives rose 17% to $28.9 billion, representing 35% of total revenue in the year.

IBM’s cloud revenues jumped 43% in 2015 while Business Analytics revenues increased 7% in the same time period. Revenues from mobile and security increased about 300% and 5%, respectively.

Geographic Revenue Details

Region-wise, revenues from the Americas, Europe/Middle East/Africa and Asia-Pacific declined 8%, 9% and 10% to $10.3 billion, $7.3 billion and $4.4 billion, respectively. Revenues from BRIC countries decreased 21% on a year-over-year basis.

Margins

Non-GAAP gross margin decreased 160 basis points (bps) to 51.7% from the year-ago quarter. Total non-GAAP operating expense & other income increased 9% year over year to $6.1 billion.

Balance Sheet & Cash Flow Details

IBM ended 2015 with $8.2 billion in total cash and marketable securities, compared with $8.5 billion on Dec 31, 2014. Total debt was $33.4 billion compared with $35.1 billion as of Dec 31, 2014.

IBM reported cash flow from operations (excluding Global Financing receivables) of $7.1 billion in the quarter compared with $7.6 billion in the year-ago quarter.

IBM generated free cash flow (excluding Global Financing receivables) of $6.1 billion in the quarter.

In 2015, IBM returned $9.5 billion to shareholders – $4.9 billion as dividends and $4.6 billion through share repurchases.

Guidance

For 2016, the company projects non-GAAP earnings to be around $13.50. The Zacks Consensus Estimate for the same is currently pegged at $15.02.

Our Take

We believe that revenues are likely to be affected in the near term as the company is currently transitioning to higher-growth markets that are not yielding enough to offset declines in traditional segments.

Also, intensifying competition in the industry is a major headwind. Further, sluggish IT spending particularly on on-premise and data center hardware along with foreign exchange volatility remain added concerns.

Nevertheless, IBM’s growth initiatives, including its Big Data & business analytics, cloud computing, mobile and social business are expected to drive growth. Also, the company is expected to benefit from its ongoing innovation and its array of interesting patents.

IBM has a Zacks Rank #4 (Sell). Better-ranked stocks in the space include NCR Corporation NCR, VASCO Data Security International Inc. VDSI and Tyler Technologies, Inc.TYL. All three stocks carry a Zacks Rank #2 (Buy).

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