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Here's What Investors Should Note Ahead of IBM's Q3 Earnings

Zacks Equity Research
·4 min read

International Business Machines Corporation IBM is scheduled to release third-quarter 2020 results on Oct 19.

On Oct 8, the company announced preliminary third-quarter 2020 results. IBM expects to report non-GAAP earnings of $2.58 per share and revenues of $17.6 billion.

The Zacks Consensus Estimate for third-quarter earnings of $2.55 per share has been steady over the past 30 days. The figure indicates a decline of 4.9% from the prior-year quarter.

For quarterly sales, the consensus mark stands at $17.51 billion that suggests decline of 2.9% from the year-ago reported figure.

Notably, the company has a trailing four-quarter earnings surprise of 1.8%, on average.

Factors Likely to Have Influenced Q3 Performance

IBM’s third-quarter performance is likely to reflect gains from solid adoption of its hybrid cloud computing capabilities, mobile, analytics, cognitive technologies and AI related solutions.

Synergies from Red Hat acquisition, particularly, are likely to have contributed to the cloud segment’s revenues. Markedly, revenues from Red Hat in second-quarter improved 18% (at constant currency) on a normalized basis. Currently, more than 2,400 clients are utilizing Red Hat and IBM’s hybrid cloud platform, and around 600 IBM Services clients are leveraging Red Hat technology.

International Business Machines Corporation Price and EPS Surprise

International Business Machines Corporation Price and EPS Surprise
International Business Machines Corporation Price and EPS Surprise

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

In this context, it is important to note that IBM has recently announced the spin-off of its legacy Managed Infrastructure Services business in an attempt to facilitate digital transformation of clients. The restructuring move is a testament to IBM’s efforts to accelerate its hybrid cloud growth strategy.

Further, IBM, currently carrying a Zacks Rank #3 (Hold), has been striving to enhance efficiency of its blockchain solutions, and quantum computing systems and services. In this respect, growing clientele of IBM Q Network remains a positive. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Also, incremental adoption of IBM Blockchain-powered World Wire, Farmer Connect and Food Trust platforms may get reflected in third-quarter revenues. In addition, the company’s growth in industry verticals like health and security is likely to have driven third-quarter performance.

Nevertheless, increasing expenses on enhancing cloud platform amid stiff competition from Microsoft MSFT Azure and Amazon’s AMZN Amazon Web Services might have weighed on IBM’s profitability in the quarter to be reported.

Moreover, the coronavirus induced crisis, may have hindered business prospects in the third quarter, owing to restricted economic activity globally. Notably, adoption of cognitive applications and transaction processing platforms in May was affected by coronavirus impacts in the second quarter, despite recovery in June. This makes us skeptical regarding its performance in the third quarter.

Key Developments in Q3

During the third quarter, IBM acquired Brazil-based robotic process automation (RPA) software provider, WDG Soluções Em Sistemas E Automação De Processos LTDA, or "WDG Automation". The aim is to strengthen end-to-end AI-infused automation capabilities to aid enterprises accelerate business processes to IT operations. Financial terms have been kept under wraps.

The company also unveiled its latest chip processor — IBM POWER 10 — which will be manufactured by Samsung Electronics. The chip is primarily meant for use across data center operations and will be based on Samsung’s 7-nanometer (nm) process technology.

Markedly, IBM POWER 10 boasts of three times enhanced performance than its predecessor, IBM POWER 9. This will help data centers achieve greater operational efficiency.

The company also expanded partnership with Workday WDAY in a bid to introduce a joint return-to-workplace focused solution to help enterprises reopen safely. The integrated solution combines IBM’s Watson Works, and Workday’s Adaptive Planning and HCM solutions.

IBM also inked a multi-year deal with Coca-Cola European Partners (“CCEP”) to help the latter move to an open hybrid cloud environment. IBM will deploy its Red Hat OpenShift and Red Hat Enterprise Linux solutions to assist CCEP in achieving operational efficiency by reducing expenses and streamlining its IT infrastructure.

The gains from latest acquisitions, product roll outs, partnerships and deal wins are expected to have driven third-quarter top line.

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