IBM picked a bad day last week (Friday) to release slightly disappointing Q4 figures but it's stock price lost almost 10% in a messy stock market, but as the stock has been in a slow steady deline since topping out in 2013, so shareholders are use to it.

 

The main takeaway however is growth in Cloud disappointed, but the drop in earning for what will be NewCo was less than expected. IBM is still generating a lot of cash, and paying down a lot of debt, although this is not necessarily good news for NewCo as it will be expected to take on as much of IBM's debt as it can handle regardless.

 

Here's the headline figures, and what was said about NewCo on the day.

 

Fourth Quarter:
GAAP EPS from continuing operations of $1.41; Operating (non-GAAP) EPS of $2.07
EPS includes the impact of a pre-tax charge of more than $2.0 billion for structural actions in the fourth quarter

Revenue of $20.4 billion, down 6 percent (down 8 percent adjusting for divested businesses and currency)
Total cloud revenue of $7.5 billion, up 10 percent (up 8 percent adjusting for divested businesses and currency)
Red Hat revenue up 19 percent (up 17 percent adjusting for currency), normalized for historical comparability
GAAP gross profit margin of 51.7 percent, up 70 basis points; Operating (non-GAAP) gross profit margin of 52.5 percent, up 70 basis points
Debt reduced by $3.9 billion since end of third quarter

Full Year:
GAAP EPS from continuing operations of $6.13; Operating (non-GAAP) EPS of $8.67
Revenue of $73.6 billion, down 5 percent (down 4 percent adjusting for divested businesses and currency)
Total cloud revenue of $25.1 billion, up 19 percent (up 20 percent adjusting for divested businesses and currency)
Red Hat revenue up 18 percent, normalized for historical comparability
GAAP gross profit margin up 100 basis points; operating (non-GAAP) gross profit margin up 130 basis points
Net cash from operating activities of $18.2 billion; free cash flow of $10.8 billion
Cash on hand of $14.3 billion; debt reduced by more than $11 billion since closing the Red Hat acquisition

 

 

"Turning to systems, revenue was down 19%, driven by product cycle dynamics, while our gross margin expanded 380 basis points. We saw the product cycle dynamics play out in IBM Z, power, and storage. Power revenue was down at a level consistent with last quarter.

And storage revenue was also down, driven by high-end storage tied to the IBM Z cycle. IBM Z revenue was down 24% as we've wrapped on a strong growth in the fourth quarter last year when we were up 63%. 90 days ago, I mentioned that clients and sectors like banking and financial markets made purchases early in the cycle to manage through robust market volatility. While those in select other industries focused on cash preservation, elongating z15 adoption.

We've made up ground in the quarter and improved adoption in some of the lagging industries. IBM Z delivered growth for the year despite a second-half wrap on the product cycle and within a challenging environment. This reflects the importance of this high-value, secure, and scalable platform with cloud-native development capabilities. Based on this performance, we expect z15 to be fairly consistent with prior cycles.

And looking back over a longer period of time, our installed base of MIPS is over 3.5 times the level of a decade ago, with 60% of our installed base now in new workload areas like Linux. The systems portfolio continues to deliver critical and lasting value to our enterprise client base in support of our hybrid cloud strategy. Turning to GTS. While revenue was down 8%, we expanded gross margin by 70 basis points.

We had strong contract renewals and added a number of new clients. As Arvind mentioned, at the beginning of October, we announced the spin-off of our Managed Infrastructure Services business into a separate public company, which we're referring to as NewCo for now. We are making good progress on that work and remain on track to complete by the end of the year. As we discussed in October, this process is complex and includes working with clients to ensure a smooth transition to NewCo as the world's leading infrastructure services provider; optimizing the business model to improve its financial profile; and executing upon the necessary financial, legal, and regulatory milestones to enable the transaction.

I'll give you some additional color on each of these three areas. First, from a client perspective, we are deeply engaged with our clients that make up the $62 billion of backlog, and they are strongly supportive. We are seeing client confidence in NewCo's long-term value proposition to manage and modernize mission-critical infrastructures. This quarter, we had wins at clients such as Dutch Ministry of Defense, PhoneGroup, and Bankinter.

In the fourth quarter, we signed 11 new logo deals, which is more than double the prior year and one of the highest in the last couple of years. Our renewal rates of existing contracts this quarter were also at the higher end of our historical performance. However, while we had a strong pipeline as we entered the quarter with the announcement, as expected, some negotiations were extended, resulting in some deals moving out of the quarter. Secondly, we are optimizing the NewCo business to have a leaner and more efficient operating model.

We continue to take a disciplined approach to improving our margins and overall financial profile. As part of this, a considerable portion of the $2 billion charge for structural actions was for GTS. We also have taken steps to restructure existing contracts and further reduce activity and lower-value offerings. These actions impacted our revenue performance this quarter but contributed to the gross margin expansion of 70 basis points.

All of this positions NewCo for an improved margin, profit, and cash generation profile. Lastly, NewCo has an unparalleled operational footprint. It has approximately 90,000 employees and operates in roughly 115 countries. And as you know, Managed Infrastructure Services is an integrated business, not only within IBM but within GTS.

We are executing on our detailed plan to achieve the milestones to create a stand-alone company. Today, we are working with works councils on employment terms, establishing NewCo's legal entities across the world, drafting the agreements, which outlined the ongoing relationship between IBM and NewCo, and developing audited financials. We expect the Form 10 to be available in the fall, at which time we will conduct investor outreach. We will continue to update our progress as we move through the year.

This is a good place to pause and turn it over to Martin Schroeter, NewCo's new CEO."