IBM sales decline accelerated in fourth quarter

IBM revealed its revenue decline accelerated in the final quarter of last year to 6.5 per cent, a bigger drop than Wall Street had projected, as its normal end-of-year IT spending bounce by customers proved weaker than expected.

However, the US technology company still said it expected to return to growth this year, reinstating revenue guidance it scrapped after the pandemic hit early last year. It also issued projections of free cash flow for this year and 2022 that pointed to steady improvements, despite uncertain tech markets that have hit normal customer buying patterns.

The latest figures highlighted IBM’s long struggle to return to sustainable growth after several years of contraction, interrupted by only a brief expansion three years ago. Adjusting for divestitures and currency movements, revenue in the final three months of 2022 declined 8 per cent, an acceleration from the 3 per cent fall it registered in the preceding three months.

Jim Kavanaugh, chief financial officer, said weaker than expected software sales had caused the sales disappointment, with total revenue coming in some $200m below expectations, at $20.4bn.

He blamed business uncertainty caused by the pandemic, which prompted software customers to sign shorter contracts than the multiyear licences they typically buy.

“We saw much shorter duration that has impacted our deal size,” he said, meaning that while the rate of contract renewals was in line with expectations, the amounts covered were lower.

However, Mr Kavanaugh added that IBM was seeing enough “green shoots” in its business to return to giving limited financial guidance for the year. These included an acceleration in revenue growth at recent acquisition Red Hat, new customer wins for its “hybrid cloud” services, and improved order backlog in its business services division.

Pro forma earnings per share for the latest period dropped 56 per cent to $2.07 because of $2bn in restructuring charges. However, they came in above the $1.79 analysts had been expecting, as gross margins improved across IBM’s business divisions.

Based on formal accounting rules, IBM reported net income of $1.3bn and earnings per share of $1.41, both down 66 per cent.

Workforce changes and preparation for the spin-off of its managed services division will wipe $3bn from free cash flow this year, IBM said. Excluding this, it said it expected free cash flow from operations to reach $11bn-$12bn this year, up from $10.8bn in 2020, and climb to $12bn-$13bn in 2022.