IBM Struggles But Generates Strong Cash Flow

Once the pioneer and leader in establishing technology as a real sector, IBM became outdated as a corporation. It lagged behind on innovation and on overall competitiveness. When one thinks of IBM, one thinks of old white men in grey suits fiddling around with massive mainframe machines. And that image has translated into a stock price falling faster than the pull of gravity. Yet while the corporation tries to regain its footing, it still does a massive amount of global business and throws of loads of cash.

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Recently, the Company announced it would lay off about 2,000 professionals who either were not performing to standards or who did not fit into IBM’s value segments of cloud and cognitive software. The layoffs should not come as a surprise as most all large corporations continuously need to clean house, especially when navigating towards a new direction. The layoffs amount to less than 1% of the Company’s workforce of 350,000, a very low percentage as compared to the bottom 10% GE sought to cull each year.

IBM has evolved to a different type of organization, or perhaps, it’s better described as a corporation accepting its limitations in the fast paced software product world. It realized its place in the world as being the people supporting the implementation of cloud and AI, and not the people actually developing proprietary software. And this strategy literally pays off. In its most recent quarter, IBM reported free cash flow of $1.7 billion off of $18 billion of revenue, which equates to 9.4% of revenues.

As IBM CFO James Cavanaugh states, "Our results reflect the fundamental changes we have made to our business, allowing us to generate greater operating leverage. In the first quarter, we significantly expanded profit margins, led by our services businesses…" followed by "Our focus on prioritizing our investments in the emerging high-value segments of our industry has enabled us to drive higher profitability and strong cash generation."

For some time now, it’s become apparent that IBM is not competing for fast growth, it’s competing for cash flow and it’s actually doing a good job at it by providing services in certain key value segments. Cloud and artificial intelligence are two of those segments, which are going to be very profitable for years to come. Other areas include open source and 5G, a game changer for the global business community.

While IBM’s revenues have been flat to declining for the last five years, it’s continued to generate cash, and a nice steady dividend. After all, as we all get older we eventually have to switch from risk taking and bold new opportunities to the predictable stream of fixed income.