IBM (IBM) Q3 2022 Earnings: What To Expect
When looking at International Business Machines (IBM), it appears that the company has been in a perpetual transformation cycle. But the recent financial results from the company’s most-recent quarter suggests that operational improvements are underway.
The question is whether this momentum can continue and will the stock, which has lagged the S&P 500 over the past three years and five years, get the respect it deserves? Answers to both questions will become more clear after the company provides its third quarter fiscal 2022 earnings results Wednesday after the closing bell. 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.
All told, the reported figures demonstrated solid revenue growth across the company’s diversified business segments. When combined with its 4.9% dividend yield, IBM has always been a great stock to buy for dividend investors, but the company is also worth a look for growth investors as well. While the company has struggled to grow revenues over the past decade and has not benefited in the massive economic expansion that saw cloud leaders such as Amazon (AMZN) and Microsoft (MSFT), IBM’s Red Hat acquisition has driven consistent double-digit revenue gains.
The company’s cloud ambitions have shown some promise in recent quarters. Currently boasting 3,800 customers on their hybrid cloud platform, which accounts for more than 70% of total software revenue in the most-recent quarter, the company no longer relies on its legacy business. The hybrid cloud provides IBM the foundation to run any application. But for the shares to maintain their relative outperformance, the company on Wednesday will need to demonstrate continued operating leverage and revenue growth acceleration.
For the three-month period that ended September, Wall Street expects the New York-based company to earn $1.78 per share on revenue of $13.53 billion. This compares to the year-ago quarter when earning were $2.52 per share on $13.25 billion in revenue. For the full year, ending in December, earnings are projected to rise 17% year over year to $9.28 per share, while revenue of $59.89 billion would rise 4.4% year over year.
As the company continues to transition away from its legacy businesses into a high-growth cloud specialist, IBM’s prospects are now much brighter. What’s more, having beaten the Streets earnings expectations in 10 of its last 11 quarters, execution is no longer an issue. In the second quarter IBM beat on both the top and bottom lines, reporting revenue of $15.54 billion which beat estimates by $359 million, while adjusted EPS of $2.31 was 2 cents better than consensus.
Demand for the hybrid cloud was a key drive of the strong results, thanks to 12% rise in software revenue to $5.8 billion. Consulting revenue up 10%, while strong revenue performance from the hybrid platform products and another high double-digit percentage jump in revenue from Red Hat were also key drivers. Hybrid cloud revenue, over the last 12 months, stood at $21.7 billion, marking an increase of 16% year over year.
The results underscored the level of execution the company has adopted amid its massive multiyear restructuring. It also highlighted a “more focused business,” as a result of the Kyndryl spinoff which simplified the business. The company forecasts 2022 free cash flow to be around $10 billion. While that figure is slightly at the low end of its guidance, the larger turnaround at IBM is certainly 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 full-revamped company with sustainable and predictable growth metrics.