IBM beats Street - but is cutting jobs, report says

RESEARCH TRIANGLE PARK – IBM reported quarterly and annual earnings on Wednesday, beating analysts’ expectations while reporting the highest annual revenue growth rate in a decade. Still, the company will cut about 1.5% of its global workforce, an executive told Bloomberg news on Wednesday.

According to the report by journalist Brody Ford, IBM will make job cuts with a “ballpark” figure of 3,900, as confirmed by the company’s chief financial officer, James Kavanaugh.

But those cuts will focus on workers who remained on IBM payroll following the company’s divestment from Kyndryl and the spin off of Watson Health, Kavanaugh told Bloomberg, adding that the company will still hire in “higher-growth areas.”

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What’s happening

IBM reported quarterly and annual earnings in a statement issued after the close of markets on Wednesday. But in after-hours trading, the company’s stock price slid down about 2% as of 5:30 p.m. on Wednesday.

Arvind Krishna, IBM chairman and chief executive officer, noted in a statement that the company’s fourth quarter performance was “solid” and “capped a year in which we grew revenue above our mid-single digit model.”

But the statement did not mention the job cuts. Nor did Krishna or Kavanaugh address job cuts during an investor conference call on Wednesday evening.

Instead, Kavanaugh and Krisha discussed IBM’s mid-term business model and the company’s performance, both for the quarter and for the prior fiscal year.

Analysts expected the company to deliver $16.4 billion in fourth quarter earnings, but IBM beat expectations, with revenues of $16.69 billion. Kavanaugh noted that revenue growth of 6% in the quarter was “broad based.”

Kavanaugh noted that Red Hat was a key contributor to the company’s revenue growth in the fourth quarter during Wednesday evening’s conference call, growing at 15%.

“We continue to see consulting as the tip of the spear,” said Kavanaugh about Red Hat’s performance.

“IBM’s revenue growth and operating profit in 2022 demonstrate the strength and multiplier effect of our platform-centric approach to hybrid cloud and AI,” said Kavanaugh in a statement released earlier in the day. “Our client-focused portfolio and strong recurring revenue stream position IBM well for continued growth, solid cash generation and returning value to shareholders through dividends.”

Closing out 2022, IBM outperformed other notable technology companies and the Nasdaq. While the Nasdaq ended the year down 33.47%, IBM’s stock price was up about 6% as of late December, CNBC reported.

In addition to the performance of Red Hat, which was acquired by IBM in a blockbuster deal in 2017, the spinoff of Kyndryl from IBM in 2021 may also have contributed to IBM’s better-than-index performance in 2022, as the company itself reported in October during its third quarter earnings call.

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Driving forward

And IBM met expectations on earnings, too.

“The consensus mark for earnings is currently pegged at $3.60 per share, indicating an improvement from $3.35 in the year-earlier quarter,” Zacks Research noted on Tuesday.

IBM reported $3.60 earnings per share in the fourth quarter.

The company generated net cash of $4 billion, up $1.4 billion for the quarter. And the firm’s free cash flow increased to $5.2 billion, an increase of $1.9 billion. At the end of the quarter, the firm held $8.8 billion of cash on hand, including marketable securities, which was up $1.3 billion from the end of year mark at the conclusion of 2021.

“The company expects constant currency revenue growth consistent with its mid-single digit model,” the earnings report reads. “At current foreign exchange rates, currency is expected to be neutral to a one-point tailwind to revenue growth.”

Kavanaugh pointed out that this would be a reversal of the prior fiscal year, when currency exchange rates created significant headwinds for the company.

“We were not expecting the currency headwinds to be as severe as it was,” Krishna said later on the call.

Kavanaugh was optimistic on the company’s ability to navigate currency exchange in 2023, which could yield better operating margins for the company.