IBM 4th Quarter Earnings: What To Expect

International Business Machines Corporation (IBM), better known as IBM, is set to report fourth quarter fiscal 2018 earnings results after the closing bell Tuesday.

Expectations are low in terms of what Wall Street will be looking for. IBM shares have fallen some 16% since the company reported Q3 earnings, during which revenue fell short of Wall Street estimates. The company, which has been in a multi-year transformation, is likely to report its second straight quarter of revenue declines.

Investors are more interested in how the company is setting itself up for the future, particularly in the strategic imperatives segment, which includes technology services, cloud-platform and cognitive-solutions (which includes IBM’s Watson AI). The main question heading into the quarter is to what extent have these newer businesses grown to offset the decline in its legacy operations? If the company can extract half of its revenue from these emerging technologies rather than from legacy mainframes, it would be on the right track.

What’s more, while the company’s $34 billion in cash deal to acquire cloud-computing company Red Hat (RHT) should strengthen its competitive positioning, executing the deal remains a question mark. The $190 per share deal, announced in late October, marked a hefty 60% premium for Red Hat in a bid to help IBM gain dominance in the hybrid cloud market. In the near term, however, Wall Street will be pleased if IBM can finally return to sustained organic growth in 2019.

For the three-month period that ended December, Wall Street expects the company to earn $4.84 per share on revenue of $21.75 billion. This compares to the year-ago quarter when earning were $5.14 per share on $22.54 billion in revenue. For the full year, earnings are projected to rise 1.02% year over year to $13.80 per share, while revenue of $77.8 billion would decline 2.70% year over year.

While the company did miss its revenue target last quarter, it wasn’t all bad news when looking deeper into the number. During the quarter, Strategic Imperatives (SI), which rose 6% year over year, generated $39.5 billion in revenue, accounting for 49% of total IBM revenue over the previous 12 months. This means the company, which targeted revenue of $40 billion for the segment, has a strong chance for SI to exceed 50% of total revenue for the year.

While there have been concerns about the company’s ability to execute in the cloud against competitors such as Amazon (AMZN), Microsoft (MSFT) and Google (GOOG , GOOGL), achieving the goal of 50% SI revenue should — in fairness — reduce criticisms related to execution. That said, IBM must also show is that SI can produce higher margins to offsets the revenue declines in the legacy business.

All told, the long and painful transition from a legacy tech operator towards a fast-growing cloud juggernaut has turned the corner. And to the extent Red Hat and Strategic Imperatives can help IBM’s top line grow by double digits in the next twelve months, IBM’s bottom line would have a pathway towards growth acceleration, making IBM stock too cheap to ignore.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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