IBM Shares Gain After Q4 Earnings Beat, Robust 2020 Profit Guide as Cloud Shift Takes Hold

IBM's shift to a cloud-driven growth model, following last year's $34 billion acquisition of Red Hat, is starting to gain traction under CEO Gini Rometty.
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International Business Machines IBM shares traded firmly higher Wednesday after the group posted stronger-than-expected fourth quarter earnings, and a robust 2020 profit outlook, as its long-term shift to cloud computing beings to find traction. 

IBM said non-GAAP earnings for the three months ending in December cam in at $4.71 per share, 2 cents ahead of the Street consensus forecast. Group revenues, IBM said, were largely flat to last year at $21.78 billion, but that figure topped analysts' estimates of a $21.64 billion tally. Quarterly operating profit margins also improved by 2.9% to 51.8%, IBM said.

Revenues from IBM'S cloud and cognitive software division, one of the two new group reporting structures put in place last year, rose 8.7% to $7.2 billion, while cloud revenues alone rose 21.8% to $6.8 billion thanks to the 2019 acquisition of Linux maker Red Hat Inc. 

Looking into 2020, IBM said it sees non-GAAP earnings of at least $13.57 per share, firmly ahead of the Refinitiv forecast of $13.29 per share.

"With our high-value mix and focus on productivity, we expanded our gross margin and we had strong free cash flow generation," IBM CFO James Kavanaugh told investors on a conference call late Tuesday. "With this trajectory, in 2020, we expect to grow revenue, operating earnings per share and free cash flow, and expand operating gross margin." 

"Putting all this together, we expect to deliver at least $13.35 of operating earnings per share for the year," he added. "Turning to free cash flow, we expect about $12.5 billion in 2020. Within that, we're expecting growth in capex, as we continue to build out cloud capacity. And as we said back in August, we expect Red Hat to be accretive to free cash flow, and that's net of the incremental interest expense."

IBM shares were marked 4.11% higher in early trading Wednesday to change hands at $145.01 each. a move that would trim the stock's six-month decline to around 2.8%.

"Fourth quarter results are a step in the right direction, giving us confidence in our view that IBM + Red Hat brings together the platform, incumbency, and expertise to help customers on the journey to hybrid cloud," said Credit Suisse analyst Matthew Cabral, who carries a $173 price target on the stock with an 'outperform' rating. 

"We’re encouraged by early proof points, including the acceleration of Red Hat and early pull-through of “core” IBM led by Red Hat-related signings doubling in GBS with 50 new client engagements in the quarter. Looking ahead, the sustainability of organic revenue growth will be key for the stock."