IBM's shares fall as revenue decline continues in Q4'20

International Business Machines Corp.'s shares fell more than 7% in after-market trading Jan. 21 after the company reported a decline in revenue for the fourth consecutive quarter.

The company's revenue for the fourth quarter ended Dec. 31, 2020, totaled $20.37 billion, down from $21.78 billion a year ago. The S&P Capital IQ consensus estimate for the quarter was $20.63 billion. Results included the impact of a pre-tax charge of $2.04 billion for structural actions in the fourth quarter, the company said.

Speaking during IBM's earnings conference call, CEO Arvind Krishna said the company's fourth-quarter performance reflects that clients continue to deal with the effects of the COVID-19 pandemic and the broader uncertainty of the macro environment.

"This puts additional pressure on larger software transactions this quarter and project delays in some services engagements," Krishna said.

Also speaking during the call, IBM CFO James Kavanaugh said the fourth quarter is IBM's seasonally largest transactional quarter. The company had also experienced a particularly strong fourth quarter in 2019, driven by software performance as well as the launch of its z15 offering.

"We knew that given our product cycle dynamics, and the pressure from the current environment, that the fourth quarter of 2020 would be our most challenging in terms of year-to-year revenue performance," Kavanaugh said.

Given the level of macroeconomic uncertainty, more clients tended to move toward shorter-duration engagements, which impacted IBM's software revenue, Kavanaugh explained.

The company's cloud and cognitive software segment was down 4.5% year over year to $6.84 billion. The segment includes cloud and data platforms, which grew 9%, led by Red Hat, while cloud revenue was up 39%. Global business services revenue was down 2% to $4.17 billion, driven by declines in application management and consulting. Global technology services revenue was down 5.5% to $6.57 billion, while systems revenue was down 17.8% to $2.50 billion.

IBM's net income for the quarter was $1.36 billion, or $1.51 per share, down from $3.67 billion, or $4.11 per share, in the prior-year period. The S&P Capital IQ consensus EPS estimate for the quarter was $1.27 on a GAAP basis and $1.88 on a normalized basis.

For full year 2020, IBM's net revenue totaled $73.62 billion, down from $77.15 billion in 2019. The S&P Capital IQ consensus estimate for the year was $73.96 billion.

The company's net income for 2020 came to $5.59 billion, or $6.23 per share, down from $9.43 billion, or $10.56 per share, in 2019. The S&P Capital IQ consensus EPS estimate for full year 2020 was $6.00 on a GAAP basis and $8.48 on a normalized basis.

IBM expects full-year 2021 revenue to show positive growth compared to 2021, with adjusted free cash flow projected in the range of $11 billion to $12 billion, Krishna said. He added that the company is also on track to separate from its Managed Infrastructure business by the end of 2021.

"In 2021, the significant changes we have made to focus on hybrid cloud and AI will also begin to take hold," Krishna said. "The company will look different at the end of the year, particularly with the execution of the spin out, but also with the operational changes to sharpen our focus."