International Business Machines Earnings: What to Look For From IBM

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International Business Machines Corp. (IBM), once the undisputed leader in computing, has struggled to boost revenue in recent years as it competes against new, fast growing rivals. This hasn’t stopped IBM from pushing into new technology frontiers, such the expansion of its quantum computing Q Network, which includes more than 100 organizations. Despite the quantum initiative’s promise, investors are likely to focus this month on whether IBM can deliver on revenue for its Global Technology Services segment when IBM reports earnings on January 21, 2020 at 5:00 p.m. EST for Q4 2019. Over the past year, IBM stock has lagged far behind the market overall, with a trailing 12-month return of 18.9% compared with 27.3% for the S&P 500. All figures are as of January 13, 2020. Analysts expect IBM to report a sharp increase in diluted earnings per share (EPS) of $4.08 on essentially flat revenue of $21.7 billion for Q4 2019.

Source: TradingView.

In recent quarters, IBM stock has reacted strongly to quarterly earnings releases, climbing after the release of Q2 2019 figures and falling sharply after both Q1 and Q3 2019 reports. On a YOY basis, IBM has seen a decline in revenue and a significant gain in diluted EPS in recent years for the Q4 period.

In Q3 2019, the stock saw an especially large swing as IBM shares plunged after EPS fell by 36.4% YOY while revenue of $18.0 billion fell about 3.9%. Falling revenue has been a major issue at the company. IBM’s annual revenue has plunged in four out of the last five years, declining from $98.4 billion in FY 2013 to a projected $77.0 billion for FY 2019.

IBM Key Metrics
  Estimate for Q4 2019 Q4 2018 Q4 2017
Earnings Per Share ($) 4.08 2.15 -1.14
Revenue ($B) 21.7 21.8 22.5
Global Technology Services Revenue ($B) 7.0 7.3 7.8
Source: YCharts and IBM

For IBM, a key metric in determining the firm’s overall strength will be its Global Technology Services (GTS) segment revenue. This refers to the revenue for IBM’s information technology (IT) services and infrastructure business. While IBM has made headlines recently because of its acquisition of cloud computing business Red Hat for $34 billion, the company’s biggest challenge is the decline of its legacy business.

GTS historically has provided the largest share of IBM’s revenue. However, GTS revenue has trended downward in recent Q4 reports. In Q3 2019, GTS revenue dropped to $6.7 billion, continuing a longer-term trend of quarterly declines. GTS revenue has fallen in 10 out of the past 12 quarters, from $8.9 billion in Q4 2016 to a projected $7.0 billion in Q4 2019.

GTS revenue has plunged as IBM has focused on growing its cloud & cognitive software segment. Based on consensus estimates of $27.4 billion in FY 2019, GTS revenue has fallen by about 19.0% since FY 2016. At the same time, cloud & cognitive revenue has grown by 18.7%. Analysts expect that the cloud & cognitive segment have larger revenue than GTS for the first time in Q4 2019.

Source: Investopedia

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