IBM (IBM) Up 3% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for IBM (IBM). Shares have added about 3% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is IBM due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

IBM Q1 Earnings Top Estimates, Revenues Miss

International Business Machines Corporation (IBM) reported first-quarter 2020 non-GAAP earnings of $1.84 per share, which surpassed the Zacks Consensus Estimate by 3.4%. However, the bottom line fell 18% on a year-over-year basis.

Revenues of $17.57 billion missed the Zacks Consensus Estimate by 1.4% and declined 3.4% on a year-over-year basis. At constant currency (cc), the top line remained flat. However, adjusting for currency and divested businesses, the top line improved 0.1%.

Markedly, total Cloud revenues came in at $5.4 billion during the quarter, up 19% year over year. Adjusting for currency and divested businesses, total cloud revenues increased 23%.

Revenues from signings increased 19% (at cc) in the first quarter to $8.9 billion. Backlog remained flat (at cc) on a year-over-year basis and amounted to $107.8 billion.

Synergies from Red Hat Acquisition

Revenues from Red Hat in the first quarter rallied 20% (at cc) on a normalized basis. Infrastructure for Red Hat continued to grow in double-digits. Moreover, OpenShift and Ansible have supported advancements in application and technology developments.

Further, the buyout has helped IBM to enhance containerized software capabilities and accelerate service engagement. Currently, more than 2,200 clients are using Red Hat and IBM’s hybrid cloud platform.

Geographic Revenue Details

Revenues from Americas remained flat year over year (excluding divestiture impacts) and came in at $8.2 billion. Revenues from Europe, Middle-East and Africa were $5.5 billion, up 1% year over year. Meanwhile, revenues from Asia-Pacific remained flat on a year-over-year basis and came in at $3.9 billion.

Cloud & Cognitive Software Segment

Cloud & Cognitive Software segment’s revenues-external rose 5.5% year over year (up 6.8% on cc basis) to $5.2 billion. The upside can be attributed to synergies from Red Hat acquisition and growth in cloud, Data & AI, security and IoT solutions. Markedly, cloud revenues soared 86% to $1.3 billion.

Revenues in the Cloud and Data platforms increased 34% year over year to $2.5 billion. The platform is gaining from Red Hat’s acquisition synergies and traction in Cloud Paks suite.

International Business Machines Corporation price-consensus-eps-surprise-chart | International Business Machines Corporation Quote

Adoption of cognitive applications and transaction processing platforms in March was affected by the coronavirus outbreak. Revenues from the Cognitive Applications declined 3% year over year to reach $1.2 billion. Revenues from the Transaction Processing Software, which includes software that runs mission-critical workloads, declined 15% on a year-over-year basis to reach $1.5 billion.

Global Business Services Segment

Revenues in the Global Business Services-external segment totaled $4.14 billion, which declined 0.5% (up 0.9% at cc) from the year-ago quarter’s figure.

Consulting revenues increased 5% year over year at cc on solid performance of IBM’s digital business to $2.1 billion. Application Management and Global Process Services revenues declined 2% and 7% (at cc) year over year to reach $1.8 billion and $0.2 billion, respectively.

Global Technology Services Segment

Revenues from Technology Services-external fell 5.9% (down 4% at cc) from the year-ago quarter to $6.47 billion.

Segmental revenues pertaining to cloud advanced 12% at cc from the prior-year quarter’s reported figure to $2.3 billion.

Infrastructure & Cloud Services and Technical Support Services revenues declined 4% and 5% (at cc) year over year to $4.9 billion and $1.6 billion, respectively.

Systems Revenues

Systems revenues-external rose 3% (up 4.1% at cc) on a year-over-year basis to $1.4 billion, primarily owing to growth in the IBM Z and Storage Systems.

Systems Hardware revenues increased 10% (at cc) year over year to $1 billion. Operating Systems Software declined 9% (at cc) year over year to $0.4 billion.

IBM Z revenues surged 61% year over year owing to gains from z15 and higher demand for data privacy and resiliency solutions across hybrid cloud. However, Power revenues fell 32% from the year-ago quarter’s tally.

Storage revenues improved 19% year over year owing to growth in high-end storage systems.

Segmental revenues pertaining to cloud advanced 10% at cc from the prior-year quarter’s reported figure, to $0.4 billion.

Finally, Global Financing (includes financing and used equipment sales) revenues-external fell 26.2% year over year and 24.9% at cc to $299 million.

Operating Details

Non-GAAP gross margin expanded 150 basis points (bps) year over year and came in at 46.2%. The gross margin benefited from synergies from Red Hat acquisition, high-value software, and systems contributions.

Non-GAAP R,D&E expenses increased 13.4% year over year to $1.63 billion.

Non-GAAP selling, general and administration (S,G&A) expenses increased 24.2% year over year to $5.67 billion.

Non-GAAP pre-tax income margin from continuing operations came in at 3.9%, from 12.3% reported in the year-ago period.

Balance Sheet & Cash Flow Details

As of Mar 31, 2020, IBM had $12 billion in total cash and marketable securities compared with $9 billion as of Dec 31, 2020.

Total debt (which includes $22.3 billion from Global Financing debt) was $64.3 billion, compared with $62.9 million reported in the last reported quarter.

The company reported cash flow from operations of $4.5 billion and generated free cash flow of $1.4 billion in the first quarter.

Moreover, the company returned $1.4 billion to shareholders through dividends.

Withdraws Guidance for 2020

For 2020, IBM has withdrawn guidance, citing uncertainty pertaining to coronavirus crisis. The company stated that it will reassess its financial position “based on the clarity of the macroeconomic recovery at the end of the second quarter.”

The company had earlier projected non-GAAP earnings per share to be at least $13.35.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -14.66% due to these changes.

VGM Scores

At this time, IBM has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise IBM has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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