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IBM's stock jumps as Q4'19 earnings, FY'20 guidance beat estimates

International Business Machines Corp.'s shares jumped in after-market trading Jan. 21 after the company reported revenue growth for the fourth quarter of 2019 and forecast earnings growth for 2020.

IBM's revenue rose 0.1% year over year to $21.78 billion, bucking analysts' expectations for a sixth consecutive quarter of year-over-year declines. The S&P Global Market Intelligence consensus estimate for the company's quarterly revenue was $21.63 billion. IBM recorded $21.76 billion in revenue for the fourth quarter of 2018.

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IBM's mainframe computers
Source: IBM

The growth was driven by IBM's cloud business: the cloud and cognitive software segment reported a 9% year-over-year gain to $7.24 billion in revenue, eclipsing the global technology services segment to become IBM's largest revenue contributor. The cloud segment includes Red Hat, the open-source software firm IBM acquired in July 2019.

Speaking during the company's earnings conference call, CFO James Kavanaugh noted that IBM's cloud business now represents 27% of the company's total revenue, with its growth now closely tied to that of Red Hat. Red Hat's quarterly revenue was up 24% year over year, eclipsing the $1 billion mark for the first time.

"Demand for our cloud capabilities continue to ramp, and we're starting to realize the synergies across IBM and Red Hat," Kavanaugh said. He pointed to Cloud Paks, the cloud-native software that IBM launched in August 2019, as one example of such synergies. Cloud Paks combines IBM's middleware, artificial intelligence, management and security offerings into Red Hat's OpenShift platform, making it easier for IBM clients to move core business applications to the cloud.

Meanwhile, IBM's global technology services segment, which has historically been the company's biggest by revenue, reported a 4% year-over-year decline in revenue, to $6.95 billion. Kavanaugh attributed the decline to lower client business volumes.

Factoring in the impact of the Red Hat acquisition, IBM's GAAP net income for the fourth quarter of 2019 was $3.67 billion, or $4.11 per share, up from $1.95 billion, or $2.15 per share, in the prior-year period. On a non-GAAP basis, net income for the period totaled about $4.21 billion, or $4.71 per share, down from $4.42 billion, or $4.87 per share. The S&P Global Market Intelligence consensus EPS estimate for the quarter was $4.08 on a GAAP basis and $4.69 on a normalized basis. Both GAAP EPS and net income included charges in 2018 related to tax reforms passed in 2017.

For full year 2019, IBM's GAAP net income totaled $9.43 billion, or $10.63 per share, up from $8.73 billion, or $9.57 per share. On a non-GAAP basis, net income for the year came to $11.44 billion, or $12.81 per share, compared to $12.66 billion, or $13.81 per share. The S&P Global Market Intelligence consensus EPS estimate for 2019 was $10.56 on a GAAP basis and $12.80 on a normalized basis. Revenue for 2019 totaled $77.15 billion, compared to $79.59 billion in 2018.

Looking ahead, IBM expects GAAP EPS of at least $10.57 and non-GAAP EPS of at least $13.35 in 2020.