By Wallace Witkowski, MarketWatch
International Business Machines Corp. is looking at a second straight quarter of revenue declines, but hopes to turn the corner to have half of its revenue derived from emerging technologies rather than from legacy mainframes.
IBM /zigman2/quotes/203856914/composite IBM -0.08% is scheduled to report fourth-quarter earnings after the close of markets on Tuesday.
IBM said its “strategic imperatives” businesses — that is, cloud, analytics, mobile, social and security — generated $39.5 billion in revenue and represented 49% of total IBM revenue over the previous 12 months through the third quarter.
Instinet analyst Jeffrey Kvaal, who has a buy rating on IBM and reduced his price target to $160, said a strong dollar still presents a headwind for IBM and will likely continue into 2019. Even as revenues slip, IBM’s focus is shifting revenue into that “strategic imperatives” column. Kvaal expects that balance to be even for the year.
“We expect Strategic Imperatives to improve upon its 3Q growth rate of 6%,” Kvaal said. “We believe cloud growth remains strong and analytics will benefit from a strong 3Q pipeline. IBM remains on track to reach its target of $40bn in SI revenue in 2018. SI should also exceed 50% of the business for 2018.”
Kvaal also sees IBM returning to sustained organic growth in 2019, which should not be “a high bar; constant currency sales have been flat to up for four straight quarters.”
In late October, IBM offered $190 a share for Red Hat Inc. /zigman2/quotes/206718834/composite RHT -0.17% , a more than 60% premium at the time, in a bid to gain dominance in the hybrid cloud market, while trimming some of its other software offerings.
Meanwhile, more recently at CES, IBM said it is still betting heavily on AI for applications to industries such as weather prediction, airlines and medical diagnostics.
Earnings: Of the 18 analysts surveyed by FactSet, IBM on average is expected to post adjusted earnings of $4.82 a share, compared with $5.18 in the year-ago quarter. The current estimate is down from the $4.89 a share expected at the beginning of the quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of $4.87 a share.
Revenue: Wall Street expects revenue of $21.73 billion from IBM, a decline of 3.5% from the $22.54 billion in the year-ago quarter, according to 17 analysts polled by FactSet. Current analyst expectations fell from the $22.1 billion forecast at the beginning of the quarter. Estimize expects revenue of $21.75 billion.
For the year, IBM reiterated its adjusted earnings outlook of “at least $13.80” and said it expects revenue growth on the year. Analysts expect earnings of $13.79 a share and revenue of $79.69 billion, or an increase of 0.7%.
Analysts surveyed by FactSet expect cognitive-solutions revenue to decline 2.9% to $5.27 billion from the year-ago quarter. Technology services and cloud-platform revenue is expected to decline 1.7% to $9.04 billion. Technology services and cloud-platform includes IBM Cloud, formerly known as Bluemix.
Global business services revenue is expected to decline 0.1% to $4.15 billion, and systems revenue is forecast to drop 17% to $2.77 billion from the year-ago period. Global business services includes consulting for modernizing business design and enterprise and cloud applications, while the systems business includes operating-systems software and the company’s mainframe business, including IBM’s z14 line of servers.
Stock movement: IBM shares have fallen nearly 16% since the company’s previous earnings report, in which revenue fell short of Wall Street estimates. In comparison, the Dow Jones Industrial /zigman2/quotes/210598065/realtime DJIA +0.37% has declined 5.5%, the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.14% has fallen 6.2% and the tech-heavy Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +0.12% has dropped 7.3% in that time.
What analysts are saying: Of the 22 analysts who cover IBM, eight have buy or overweight ratings, 11 have hold ratings and three have sell or underweight ratings, with an average price target of $146.26.
Stifel analyst David Grossman, who has a buy rating and a $178 price target on IBM, said he expects earnings per share and free cash flow at the company to remain relatively flat in 2019 and 2020, with growth resuming in 2021.
“This analysis assumes no revenue or cost synergies from the RHT acquisition and modest headwinds from IBM’s residual core,” Grossman said.