IBM earnings: Short-term revenue pain needs to translate into services growth
International Business Machines Corp. needs to show how the short-term pain of declining revenues is going to pay off as the company keeps shifting toward a more services-oriented business.
IBM IBM, -0.31% is scheduled to report first-quarter earnings after the close of trading on Tuesday.
Stifel analyst David Grossman, who has a buy on IBM, said the first quarter is usually seasonally weak so he doesn’t expect any changes to IBM’s outlook. Last earnings report, the company forecast adjusted earnings of “at least $13.90” a share for the year.
“The cognitive/software segment should be stable (flattish +/-) given it is coming off a very strong transactional 4Q18 and will still include the pending divestitures, which are a headwind to growth,” Grossman said.
Divestitures and the finalization of IBM’s acquisition of Red Hat Inc.RHT, -0.03% to shore up its hybrid cloud offerings should improve fundamentals in the cognitive business, he said.
Earnings: Of the 18 analysts surveyed by FactSet, IBM on average is expected to post adjusted earnings of $2.22 a share, compared with $2.45 in the year-ago quarter. The current estimate is down from the $2.26 a share expected at the beginning of the quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of $2.27 a share.
Revenue: Wall Street expects revenue of $18.47 billion from IBM, a decline of 3.2% from the $19.07 billion in the year-ago quarter, according to 17 analysts polled by FactSet. Current analyst expectations have fallen from the $18.78 billion forecast at the beginning of the quarter. Estimize expects revenue of $18.75 billion.
Analysts surveyed by FactSet expect cognitive-solutions revenue to decline 2.9% to $4.18 billion from the year-ago quarter. Technology services and cloud-platform revenue is expected to decline 4.4% to $8.25 billion. Technology services and cloud-platform includes IBM Cloud, formerly known as Bluemix.
Global business services revenue is expected to rise 0.4% to $4.19 billion, and systems revenue is forecast to drop 8.6% to $1.37 billion from the year-ago period. Global business services includes consulting for modernizing business design and enterprise and cloud applications, while the systems business includes operating-systems software and the company’s mainframe business, including IBM’s z14 line of servers.
Stock movement: IBM shares have gained more than 17% since the company’s previous earnings report, when the company forecast annual earnings ahead of Wall Street estimates. In comparison, the Dow Jones Industrial Average DJIA, -0.10% has risen 8.3%, the S&P 500 index SPX, -0.06% has gained 10.4% and the tech-heavy Nasdaq Composite Index COMP, -0.10% has risen more than 14% in that time.
What analysts are saying: Of the 21 analysts who cover IBM, six have buy or overweight ratings, 13 have hold ratings and two have sell or underweight ratings, with an average price target of $143.81.
Wedbush analyst Moshe Katri, who has a neutral rating and a $165 price target, said he believes IBM’s “results continue to be impacted by the cannibalization in its legacy software/services businesses, which we peg at roughly 70% of revenues.”
Katri said that management is being aggressive in trying to shift revenue into high-growth services, but he needs to see more.
“However, in order for us to become more constructive on the name, we need to see indications that results at standalone IBM have stabilized,” Katri said. “The closest example of a vendor successfully transforming its revenue base into digital both organically and via acquisitions is outperform-rated Accenture.”
Katri said quarterly services bookings and total reported backlog levels, along with what the company says about IT spending trends, will be important.
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