Shares of International Business Machines (IBM) have been rangebound over the past six months, while falling 9% year to date compared to 8% rise in the S&P 500 index. This suggests the market is still waiting for the company’s transformation to produce sustainable revenue results. But beyond the attractive dividend, does IBM have other qualities worth waiting for?
This question, among others, will be discussed when the company reports its first quarter fiscal 2023 earnings results Wednesday after the closing bell. Although progress has been made from an earnings perspective, revenue growth has come to a standstill. In an effort to simplify the business, the company is reportedly looking to divest the weather business, which includes weather.com.
Reports suggest the sale could be valued at more than $1 billion, which would be roughly half of what the company paid for the business when it was purchased in 2015. From an investor perspective, it appears that the company has been in a perpetual transformation cycle, struggling to grow revenue over the past decade. The good news is the company no longer relies heavily on its legacy business, with its hybrid cloud platform accounting for more than 70% of total software revenue in the most recent quarter.
IBM's cloud prowess has been strong in recent quarters, emerging more modernized and providing the sort of revenue strength needed to support a higher multiple. Currently boasting 3,800 customers, the hybrid cloud platform provides IBM the foundation to run any application. But for the shares to show more signs of life, beyond the appeal of the 5.16% dividend yield, the company on Wednesday will need to demonstrate continued operating leverage and revenue growth acceleration.
For the three-month period that ended March, Wall Street expects the New York-based company to earn $1.26 per share on revenue of $14.35 billion. This compares to the year-ago quarter when earnings were $1.26 per share on $14.2 billion in revenue. For the full year, ending in December, earnings are projected to rise 3.83% year over year to $9.48 per share, while revenue of $62.68 billion would rise 3.6% year over year.
Despite the lackluster movement of the stock, IBM’s prospects are now much brighter, particularly as the company continues to transition away from its legacy businesses into a high-growth cloud specialist. What’s more, having beaten the Street's earnings expectations in 10 of its last 11 quarters, execution is no longer an issue. In the fourth quarter IBM beat on both the top and bottom lines, reporting revenue of $16.69 billion which beat estimates by $313 million, while adjusted EPS of $2.96 was 22 cents better than consensus.
Demand for the hybrid cloud was a key drive of the strong results, thanks to 8% rise in software revenue to $7.29 billion. Q4 consulting revenue edged up by 0.5% to $4.8 billion driven from the hybrid platform products and another high double-digit percentage jump in revenue from Red Hat. Infrastructure revenue was also solid, coming in at $4.5 billion, up 1.6% year over year. During the quarter, the company added $5.21 billion in free cash flow.
The results underscored the level of execution the company has adopted amid its massive multiyear restructuring. It also suggest that the larger turnaround at IBM might finally be underway, especially when assessing the solid growth in revenue and free cash flow. On Wednesday investors will want to see whether IBM can build on this success. The market will also want to see the company finally graduate from a persistent turnaround story to a fully-revamped company with sustainable and predictable growth metrics.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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