IBM Struggled With the Tax Man in the 4th Quarter

Enterprise-computing titan IBM (NYSE: IBM) reported fourth-quarter and full-year results on Thursday night. On the upside, revenues increased for the first time in six years and Big Blue has marked a clear path toward more growth in the future. On the downside, a massive tax charge resulted in negative GAAP earnings.

Image source: Getty Images and IBM, edited by the author.

IBM’s fourth-quarter results: The raw numbers

Metric	Q4 2017	Q4 2016	Year-Over-Year Change
Revenue	$22.5 billion	$21.8 billion	3.2%
Net income (loss)	($1.05 billion)	$4.50 billion	N/A
GAAP earnings (loss) per diluted share	($1.14)	$4.72	N/A

Data source: IBM.

What happened with IBM this quarter?

• IBM’s quarterly revenues increased year over year for the first time since the spring of 2012.
• Sales under the banner of strategic imperatives increased by 17%, to $11.1 billion, accounting for 49% of the company’s total revenues.
• Among the strategic imperatives, cloud-computing services saw 30% annual growth and delivered $5.5 billion in fourth-quarter sales. Data-analytics orders rose by 9%, mobile solutions experienced 23% year-over-year sales growth, and security revenues more than doubled.
• The GAAP results in the table above include a one-time tax charge of $5.5 billion. The reported tax rate worked out to 124% of IBM’s pre-tax income. This unusual charge was triggered by the tax reform bill that was passed in December, and includes a tax on accumulated foreign profits, along with revamped values of the balance sheet’s deferred tax assets and liabilities. In short, IBM’s collection of unused tax credits is now worth less than it used to be. Without these special charges, IBM’s tax rate would have been 6.1% in the fourth quarter.
• Full-year revenues fell 1%, to $79.1 billion. Adjusted earnings stopped at $13.80 per share in 2017, in line with guidance targets from the second and third quarters.

What management had to say

CEO Ginni Rometty dropped a few red-hot buzzwords into her official commentary on this quarter: “During 2017, we strengthened our position as the leading enterprise cloud provider and established IBM as the blockchain leader for business,” she said. “Looking ahead, we are uniquely positioned to help clients use data and [artificial intelligence] to build smarter businesses.”

Looking ahead

For fiscal year 2018, IBM expects to boost its adjusted earnings, with the baseline set at $13.80 per share. A new lineup of Power9 server systems should help stabilize hardware sales, as the surge from last year’s new mainframe portfolio trails off. Strategic imperatives will continue to grow while legacy operations keep shrinking; that high-growth category of businesses should deliver well above 50% of IBM’s top-line sales this year.

Beyond that, the return to positive revenue growth should mark the start of a constructive top-line trend. Big Blue is also expanding its gross margins, thanks to a richer sales mix. Those strategic imperatives are helpful in many ways.

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