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IBM Gears Up to Report Q3 Earnings: What's in the Cards?

Zacks Equity Research

International Business Machines IBM is set to report third-quarter 2019 results on Oct 16.

Notably, the company delivered average positive earnings surprise of 1.8% in the trailing four quarters. In the last reported quarter, IBM came up with a positive earnings surprise of 3.6%.

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

Last Quarter’s Performance

In the last reported quarter, the company delivered non-GAAP earnings of $3.17 per share, which surpassed the Zacks Consensus Estimate of $3.06. Further, earnings per share increased 9 cents from the year-ago quarter.

Revenues of $19.16 billion outpaced the Zacks Consensus Estimate of $19.11 billion but declined 4.2% on a year-over-year basis. At constant currency (cc), the metric dipped 1.6%.

What to Expect in Q3

The Zacks Consensus Estimate for third-quarter earnings is pegged at $2.64, unchanged for the past seven days. This indicates a fall of about 22.8% from the year-ago quarter’s earnings. For quarterly sales, the consensus mark stands at $18.24 billion, suggesting a year-over-year decline of 2.7%.

Notably, currency fluctuation and headwinds from the IBM Z product cycle might have weighed on the to-be-reported quarter's results.

Things to Watch Out

IBM is likely to have benefited from significant investments in cloud computing, mobile, security, analytics, cognitive technologies and AI in the to-be-reported quarter.

Deal wins strengthen the company’s prospects in the cloud computing space. IBM recently announced a collaboration with the City of Los Angeles and the LA Cyber Lab to combat cybercrime. The collaboration is likely to have strengthened the technical capabilities of IBM’s security lab, which primarily focuses on developing solutions that enhance mobile and application security. This effectively counters fraud and detects malware. The latest collaboration is also expected to drive the top line, going forward.

Moreover, the company recently announced a new quantum computing milestone at the Second Post-Quantum Cryptography Standardization Conference held by the National Institute of Standards and Technology (NIST).

Quantum computing has its applications in many fields such as AI, financial services, cloud security, drug discovery, and supply chain and logistics.

IBM is striving to enhance the efficiency of its quantum computing systems and services. With quantum computing initiatives, the company attempts to help enterprises accelerate difficult financial and technical problems in real time.

Further, IBM’s attempt to bolster the hybrid cloud business with the Red Hat acquisition is likely to have paved the way for growth.

We believe that the company’s portfolio strength will help expand the customer base and aid the to-be-reported quarter’s results.

Furthermore, IBM witnessed growth in industry verticals like health, key areas of analytics and security in the quarter-under review. Watson Health witnessed broad-based growth in Payer, Provider, Imaging and Life Sciences domains. This momentum is likely to get reflected in the to-be-reported quarter’s results.

IBM’s expanding portfolio is also noteworthy. Notably, it recently announced that IBM Garage is enabling approximately 500 enterprises to implement robust business transforming strategies. IBM Garage leverages AI, machine learning, blockchain, IoT, DevOps tools and robust cognitive capabilities to provide clientele with end-to-end workflows.

Moreover, IBM Garage is enabling ADP to integrate AI capabilities across business processes to enhance customer engagement. The move is expected to have driven the company’s top line in the third quarter and beyond.

IBM is also benefiting from notable customer wins, especially in the sports domain, lately. The company is introducing several initiatives to enhance the entire sports league experience for entities like the players, coaches to fans and management.

The company’s bid to integrate AI into sports systems is in sync with its strategy to go beyond fan engagement to influence industry players with robust strategies. These innovative solutions by IBM’s Watson position the company well to gain momentum.

While these developments are expected to positively impact the upcoming quarterly results, IBM’s continued investments and pricing pressure related to its legacy hardware business, and ballooning debt levels are headwinds.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

IBM has an Earnings ESP of -0.57% and a Zacks Rank #2.

Stocks to Consider

Here are some stocks you may consider, as our model shows that these have the right combination of elements to post an earnings beat in their upcoming releases:

The Progressive Corporation PGR has an Earnings ESP of +0.89% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Wells Fargo & Company WFC has an Earnings ESP of +5.79% and a Zacks Rank #3.

AT&T Inc. T has an Earnings ESP of +1.54% and a Zacks Rank #3.

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