IBM Beats Q3 Earnings Estimates on Resilient Cloud Demand
International Business Machines Corporation IBM reported mixed third-quarter 2023 results, wherein the bottom line beat the Zacks Consensus Estimate but the top line missed the same. However, the company witnessed healthy demand for hybrid cloud and AI solutions with a client-focused portfolio and broad-based growth.
Net Income
On a GAAP basis, net income from continuing operations was $1,714 million or $1.86 per share against a net loss of $3,214 million or a loss of $3.55 per share in the year-ago quarter. The improvement in GAAP earnings was primarily attributable to top-line growth and lower operating expenses.
Excluding non-recurring items, non-GAAP net income from continuing operations was $2.20 per share compared with $1.81 in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 8 cents.
International Business Machines Corporation Price, Consensus and EPS Surprise
International Business Machines Corporation price-consensus-eps-surprise-chart | International Business Machines Corporation Quote
Quarter Details
Quarterly total revenues increased to $14,752 million from $14,107 million on strong demand for hybrid cloud and AI, driving growth in the Software and Consulting segments. On a constant currency basis, revenues were up 3.5% year over year. The top line, however, missed the consensus estimate of $14,771 million.
Gross profit was $8,023 million compared with $7,430 million in the prior-year quarter, resulting in respective gross margins of 54.4% and 52.7% owing to a strong portfolio mix. Total expenses decreased to $6,150 million from $11,931 million, driven by improvement in the business mix and ongoing productivity initiatives.
Segmental Performance
Software: Revenues improved to $6,265 million from $5,811 million, driven by growth in Hybrid Platform & Solutions, Red Hat, Automation, Data & AI and Transaction Processing. The reported segment revenues exceeded our estimate of $6,164 million owing to solid hybrid cloud traction. Segment pre-tax income from continuing operations was $1,486 million compared with $1,306 million in the year-ago quarter for respective margins of 23.7% and 22.5%. The company is witnessing healthy hybrid cloud adoption by clients and solid demand trends across RedHat, automation and Data & AI.
Consulting: Revenues were $4,963 million, up from $4,700 million, led by pervasive growth driven by demand for digital transformation, increasing revenues across all business lines and regions. The reported segment revenues missed our estimate of $5,064 million. Segment pre-tax income was $509 million compared with $462 million in the year-ago quarter, driven by productivity enhancement initiatives for respective margins of 10.2% and 9.8%.
Infrastructure: Revenues were $3,272 million, down from $3,352 million, owing to lower demand for Distributed Infrastructure and support services. Segment pre-tax income was $387 million compared with $280 million in the year-ago quarter for respective margins of 11.8% and 8.3%.
Financing: Revenues improved to $186 million from $174 million. Segment pre-tax income was $91 million compared with $79 million in the year-ago quarter for respective margins of 49.2% and 45.4%.
Cash Flow & Liquidity
During the third quarter, IBM generated $3,055 million in cash from operations compared with $1,901 million in the year-ago quarter, bringing the respective tallies for the first nine months of 2023 and 2022 to $9,468 million and $6,470 million. Free cash flow was $1,682 million in the quarter, up from $752 million in the prior-year period, driven by higher profit and working capital efficiencies. As of Sep 30, 2023, the company had $7,257 million in cash and cash equivalents with $48,828 million of long-term debt.
Outlook
For full-year 2023, the company expects 3-5% revenue growth on a constant currency basis. Free cash flow is estimated to be approximately $10.5 billion.
Zacks Rank & Stocks to Consider
IBM currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Arista Networks, Inc. ANET, carrying a Zacks Rank #2 (Buy), is likely to benefit from strong momentum and diversification across its top verticals and product lines. The company has a software-driven, data-centric approach to help customers build their cloud architecture and enhance their cloud experience. Arista has a long-term earnings growth expectation of 18.7% and delivered an earnings surprise of 12.8%, on average, in the trailing four quarters.
It holds a leadership position in 100-gigabit Ethernet switching share in port for the high-speed datacenter segment. Arista is increasingly gaining market traction in 200- and 400-gig high-performance switching products and remains well-positioned for healthy growth in data-driven cloud networking business with proactive platforms and predictive operations.
Bandwidth Inc. BAND, carrying a Zacks Rank #2, is another key pick from the broader industry. It delivered an earnings surprise of 372.9%, on average, in the trailing four quarters.
Headquartered in Raleigh, NC, Bandwidth operates as a Communications Platform-as-a-Service provider, offering avant-garde software application programming interfaces for voice and messaging services. It is the only application programming interface platform provider that owns a Tier 1 network with enhanced network capacity, primarily catering to business enterprises.
United States Cellular Corporation USM, carrying a Zacks Rank #2, is the fourth largest full-service wireless carrier in the United States. The company provides a range of wireless products and services, and a high-quality network to increase the competitiveness of local businesses and improve efficiency of government operations.
U.S. Cellular has taken concrete steps to accelerate subscriber additions and improve churn management. The company aims to offer the best wireless experience to customers by providing superior quality network and national coverage. It is well-positioned to support the investment required for network enhancements, including the deployment of 5G technology. The company is well-positioned for continued demand for broadband.
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