4 Key Takeaways From General Electric Company's Management
Image source: General Electric.
As usual, there were a lot of moving parts to General Electric's (NYSE: GE)recent second-quarter earnings. Among other things, GE continued to divest the majority of its financial services arm; it was granted permission to no longer be labeled as a systematically important financial institution by regulators; and Alstom contributed favorably to the company's revenue growth.
Along with its earnings release, GE's management team hosted a conference call to provide more clarity about what happened during the quarter, as well as GE's future prospects. There were four main takeaways from the call.
Digital orders on track to hit $7 billion this year
GE has made it a goal to generate $15 billion a year from software sales by 2020, a threefold increase from the $5 billion it generated in 2015. It's launched several product and service offerings that cater to its Industrial Internet of Things initiative. With the help of internet-connected sensors, big-data analytics, and real-time optimization, the Industrial Internet promises to improve the productivity of an industrial asset, whether it's an entire wind farm, a factory, a power plant, or an aircraft engine.
In the second quarter, GE CEO Jeff Immelt noted that digital orders increased 15% year over year, while revenue increased 17%. Immelt also highlighted that GE's Predix platform -- the world's first industrial-based cloud operating system that can harness the power of the Industrial Internet -- is exceeding adoption expectations:
Oil and gas trims more fat
GE's oil and gas segment continues to struggle from the fallout in oil prices and drilling activity. The segment's second-quarter revenue fell 22% year over year to $3.2 billion, and operating profits fell 48% to $320 million. In response to these ongoing challenges, CFO Jeff Bornstein noted that the segment plans to cut costs further to make its oil and gas business more competitive:
LEAP enters service
GE's next-generation LEAP jet engine, which was co-developed via CFM International -- a joint venture with Safran -- officially entered service just after the second quarter ended. The engine features 3D-printed fuel nozzles and advanced ceramic-matrix composite materials to help it achieve a 15% improvement in fuel efficiency compared to its predecessor. At the close of the second quarter, GE had a backlog of over 11,000 LEAP engines to fulfill.
During the call, David Joyce, CEO of GE Aviation, updated investors about LEAP's competitiveness and production schedule:
GE Capital exit nearing completion
Since GE announced its plan to divest the majority of GE Capital in order to become more focused on its industrial businesses, the company has announced $181 billion in signings out of approximately $200 billion in expected asset sales. Of the $181 billion in signings, GE has closed about $168 billion.
On the call, Bornstein said he expects that the remaining assets will be signed by the end of the third quarter:
In other words, once these final signings close, GE won't be far away from completing this massive divestment.
No changes to outlook
GE's organic revenue, which accounts for the impact of currency fluctuations, dispositions, and acquisitions, fell 1% year over year to $24.5 billion in the second quarter. Despite this weakness, Immelt has made no change to GE's full-year guidance, which calls for between 2% and 4% organic revenue growth:
The bigger picture
While GE's management team expect the world to remain a volatile place for the foreseeable future, they also believe that the company's diversified business model will help it reach its goal of earning $2.00 per share in operating profits in 2018. This year, GE expects to generate between $1.45 and $1.55 per share in operating profits. Clearly, management doesn't see macro volatility getting in the way of GE growing its profits.
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Steve Heller has no position in any stocks mentioned. The Motley Fool owns shares of General Electric and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.