Factors Expected to Influence IBM This Earnings Season
International Business Machines IBM is set to report first-quarter fiscal 2019 results on Apr 16. Notably, the company surpassed the Zacks Consensus Estimate in the trailing four quarters with average beat of 1.39%.
In the last reported quarter, the company delivered non-GAAP earnings of $4.87 per share, beating the Zacks Consensus Estimate of $4.81 per share. However, earnings per share (EPS) decreased 5.9% from the year-ago quarter. The year-over-year decline in EPS can be attributed to higher tax rate.
Revenues of $21.76 billion were almost in line with the Zacks Consensus Estimate of $21.74 billion. However, the figure declined 3.5% on a year-over-year basis. At constant currency (cc), revenues dipped 1%. The year-over-year decline can primarily be attributed to currency fluctuation and headwinds from IBM Z product cycle.
Guidance & Estimates
The Zacks Consensus Estimate for the to-be-reported quarter is pegged at $18.65 billion, down roughly 2.2% from the year-ago quarter. Further, the consensus mark for earnings is pegged at $2.22 per share, indicating year-over-year decline of 9.4%.
IBM expects non-GAAP EPS forecast for 2019 to be at least $13.90. The Zacks Consensus Estimate for earnings is pegged at $13.91 per share, up marginally 7% year over year.
Let’s see how things are shaping up prior to this announcement.
International Business Machines Corporation Price and EPS Surprise
Factors to Consider
IBM’s initiatives in blockchain, cloud and enterprise AI market through product rollouts and strategic deals bode well. Moreover, the company’s improving clout in the cloud, security and analytics remains a tailwind.
In the fourth quarter, Strategic Imperatives (cloud, analytics, mobility and security) grew 5% from the year-ago quarter to $11.5 billion.
Cloud revenues surged 6% from the year-ago quarter to $5.7 billion and 19% (excluding IBM Z product cycle impact).
Coming to Systems, the segment comprises both hardware and operating systems software revenues. Broad-based adoption of the z14 mainframe, power systems and strong flash sales remain key catalysts for the segment.
Systems revenues decreased 21% on a year-over-year basis (down 20% at cc) to $2.6 billion, primarily owing to impact of the IBM Z product cycle. Segmental revenues pertaining to Strategic Imperatives plunged 22%, while Cloud revenues declined 31%.
IBM Z revenues decreased 44% year over year. However, MIPS capacity has increased around 20%, driven by broad-based adoption of the z14 mainframe.
Cognitive Solutions’ revenues-external increased 2% year over year (on cc basis) to $5.5 billion. Revenues from Cognitive Solutions (including solutions software and transaction processing) increased primarily on account of growth in solutions software, including analytics and artificial intelligence (AI). The Zacks Consensus Estimate for the first quarter is currently pegged at $4.14 billion.
Revenues from Global Business Services-external segment were $4.3 billion, up 4% from the year-ago quarter (up 6% at cc). The year-over-year increase was primarily due to growth across all three business areas namely consulting, application management and global process services. The Zacks Consensus Estimate for the first quarter is pegged at $4.23 billion.
Revenues from Technology Services & Cloud Platforms-external decreased 3% from the year-ago quarter (flat at cc) to $8.9 billion. The Zacks Consensus Estimate for the first quarter is pegged at $8.27 billion.
Product Rollouts & Strategic Deals: Key Catalysts
IBM recently completed the launch of its next generation POWER9 processors for mid-range and high-end systems. These are designed for handling advanced analytics, cloud environments and data-intensive workloads in AI, HANA, and UNIX markets.
The company also introduced new offerings optimizing both hardware and software for AI. Management believes that products like PowerAI Vision and PowerAI Enterprise will help drive new customer adoption.
IBM expanded partnership with Vodafone Group. Per the deal, IBM’s advanced hybrid cloud platform, AI, and IoT capabilities will aid Vodafone Business with digital transformation initiatives.
IBM also announced that IBM Cloud will be utilized by RemoteMyApp, a game streaming startup based out of Poland. IBM Cloud will aid RemoteMyApp to expand global market reach and enhance its flagship gaming platform, Vortex.
The robust growth in cloud gaming market and increasing focus on video game streaming platforms presents significant growth opportunity for IBM.
Further, IBM cloud is witnessing increasing adoption across businesses based in Europe as evident from this deal. Notably, IBM Cloud offers local EU-based support to its clientele by which access can be confined to solely EU-based IBM employees. These factors are aiding the tech giant to expand foothold in Europe
IBM is also benefiting from notable customer wins, especially in the sports domain of late. IBM is introducing several initiatives to bolster experience of the entities involved in sports leagues, from players, coaches to fans and management.
The company’s bid to integrate AI into sports systems’ is in sync with its strategy to go beyond fan engagement to influencing players with robust strategies. These innovative solutions aided by IBM’s Watson positions the company well in gaining momentum.
IBM is also gaining momentum in blockchain technology. The traction witnessed by the company’s Watson Ads offering is bolstering the top line, in turn aiding IBM to better compete against peers.
While these developments are expected to positively impact results, IBM’s continuing investments and pricing pressure related to its legacy hardware business and ballooning debt levels remain headwinds.
What the Zacks Model Unveils
According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.
IBMhas a Zacks Rank #3 and an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Stocks with Favorable Combination
Here are a few stocks that are worth considering as our model shows that these have the right combination of elements to deliver an earnings beat in the upcoming releases.
The Progressive Corporation PGR has an Earnings ESP of +0.09% and a Zacks Rank #2.You can see the complete list of today’s Zacks #1 Rank stocks here.
RLI Corp. RLI has an Earnings ESP of +2.56% and a Zacks Rank #2.
Netflix, Inc. NFLX has an Earnings ESP of +0.44% and a Zacks Rank #3.
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