IBM's Earnings: What You Need To Know

IT products and services giant International Business Machines (NYSE:IBM) reported fourth-quarter results Tuesday evening. The company met its stated full-year earnings targets while fighting some currency-exchange headwinds.

IBM's fourth-quarter results: The raw numbers

The year-ago period included an unusually large tax bill as the Trump administration's tax overhaul took effect, and IBM took a major one-time charge to repatriate money it was holding overseas. IBM's effective tax rate for Q4 2017 stood at a massive 124%. Backing out that tax charge and other one-time items from the year-end quarters of both 2018 and 2017, adjusted earnings from continuing operations fell 5.3% to $4.87 per diluted share.

What happened with IBM this quarter?

• In a lull between updates in the mainframe systems life cycle, IBM's systems division reported external revenues of $2.62 billion, 20% below the year-ago period's result at constant-currency rates.
• Cognitive solutions revenues hit $5.46 billion, up 0.4% year over year after backing out currency effects.
• On the same currency-neutral basis, IBM's global business services sales rose 6.5% to $4.32 billion.
• Technology and cloud services saw constant-currency revenues hold steady at $8.93 billion.
• IBM reported $3.2 billion in free cash flow for the quarter, and $11.5 billion for the full year. $5.7 billion of the annual cash flow was funneled into dividend payouts, and another $4.4 billion was used to repurchase shares.
• Revenues from IBM's strategic imperatives businesses rose 9% for the full year, representing exactly half of the company's total sales.

What management had to say

On a conference call with financial analysts, CFO Jim Kavanaugh highlighted the impact he expects to see when the pending acquisition of open-source software veteran Red Hat (NYSE:RHT) closes later this year.

From a value perspective, in addition to the growing Red Hat business itself, we see an opportunity to lift all of IBM, by selling more of our own IBM Cloud and by selling more of our analytics and AI capabilities on OpenShift across multiple platforms. As clients proceed on their journey to get more business value from the cloud, they need more services help, from the digital design to app modernization to native app development to management of hybrid cloud environments.

...

Our hand will only get stronger with the addition of Red Hat, which positions us as the leader in hybrid, multi-cloud world.

Looking ahead

For the new fiscal year, IBM's management forecasts GAAP diluted earnings of at least $12.45 per share, and adjusted earnings of no less than $13.90 per share. These targets compare to $9.51 and $13.81 per share, respectively, for fiscal 2018.

Further, Big Blue's free cash flow should stay close to its reported GAAP earnings and hold steady at roughly $12 billion in 2019.

These targets exclude any contributions from Red Hat, as the exact timing of that deal's closing will make a big difference in how much revenue and profit it adds. For the record, Red Hat reported net income of $279 million and free cash flow of $905 million over the last four quarters, and should add value to IBM's bottom line from day one.

This article originally appeared in the Motley Fool.

Anders Bylund owns shares of IBM and Red Hat. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.