IBM (IBM) Down 0.9% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for IBM (IBM). Shares have lost about 0.9% in that time frame, underperforming the S&P 500.

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

IBM Q2 Earnings and Revenues Top Estimates

International Business Machines Corporation (IBM) reported second-quarter 2020 non-GAAP earnings of $2.18 per share, which surpassed the Zacks Consensus Estimate by 1.9%. However, the bottom line fell 31% on a year-over-year basis.

Revenues of $18.12 billion outpaced the Zacks Consensus Estimate by 2.3% but declined 5.4% (as reported) on a year-over-year basis. At constant currency (cc), the top line fell 3.9%. Meanwhile, adjusting for currency and divested businesses, revenues were down 1.9%.

Revenues from signings declined 14% (at cc) in the second quarter to $8.2 billion. Backlog was down 1% at cc (down 4% at actual) on a year-over-year basis and amounted to $107.1 billion.

Nevertheless, total Cloud revenues were $6.3 billion during the quarter, up 30% year over year. Adjusting for currency and divested businesses, total cloud revenues increased 34%.

Synergies from Red Hat Acquisition

Revenues from Red Hat in the second quarter totaled $1.09 billion, reflecting an increase of 17% (up 18% at cc) on a normalized basis. The buyout has helped IBM to enhance containerized software capabilities and accelerate service engagement.  Moreover, OpenShift and Ansible have supported advancements in application and technology developments. Currently, more than 2,400 clients are using Red Hat and IBM’s hybrid cloud platform, and around 600 IBM Services clients are leveraging Red Hat technology.

Management is optimistic about enhancing utility of hybrid cloud services based on architecture built by IBM and Red Hat, by notable clients including American Express, Bharti Airtel, Vodafone, Banco Sabadell, Broadridge Financial Solutions, and Caixa Bank.

Geographic Revenue Details

Revenues from Americas remained flat year over year at cc (excluding divestiture impacts) and were $8.5 billion. Revenues from Europe, Middle-East and Africa were $5.7 billion, down 3% year over year. Meanwhile, revenues from Asia-Pacific declined 4% on a year-over-year basis and were $4 billion.

Cloud & Cognitive Software Segment

Cloud & Cognitive Software segment’s revenues-external rose 3% year over year (up 5% on cc basis) to $5.7 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 116% to $1.6 billion.

Revenues in the Cloud and Data platforms increased 29% year over year (up 30% on cc basis) to $2.8 billion. The platform is gaining from Red Hat’s acquisition synergies and traction in Cloud Paks suite.

Adoption of cognitive applications and transaction processing platforms was affected by the coronavirus outbreak. In May, the decline was worse than anticipated, and recovery in June failed to bring the tally to “normal levels.” Revenues from the Cognitive Applications declined 8% year over year to $1.2 billion. Revenues from the Transaction Processing Software, which includes software that runs mission-critical workloads, declined 14% on a year-over-year basis to $1.7 billion.

Global Business Services Segment

Revenues in the Global Business Services-external segment totaled $3.9 billion, which declined 7% (down 6% at cc) from the year-ago quarter.

Consulting revenues declined 3% year over year at cc to $1.9 billion. Application Management and Global Process Services revenues declined 8% and 12% (at cc) year over year to $1.7 billion and $0.2 billion, respectively.

Global Technology Services Segment

Revenues from Technology Services-external fell 8% (down 5% at cc) from the year-ago quarter to $6.3 billion.

Segmental revenues pertaining to cloud advanced 20% at cc from the prior-year quarter’s reported figure to $2.4 billion.

Infrastructure & Cloud Services and Technical Support Services revenues declined 5% and 6% (at cc) year over year to $4.8 billion and $1.5 billion, respectively.

Systems Revenues

Systems revenues-external rose 6% at cc on a year-over-year basis to $1.9 billion, primarily owing to growth in the IBM Z and Storage Systems.

Systems Hardware revenues increased 13% (at cc) year over year to $1.5 billion. Operating Systems Software declined 13% (at cc) year over year to $0.4 billion.

IBM Z revenues surged 68% year over year courtesy of gains from innovation in z15 mainframe, and higher demand for data privacy and resiliency solutions across hybrid cloud. However, Power revenues fell 28% from the year-ago quarter.

Storage revenues improved 3% year over year owing to growth in high-end storage systems.

Segmental revenues pertaining to cloud advanced 22% at cc from the prior-year quarter’s reported figure to $0.8 billion.

Finally, Global Financing (includes financing and used equipment sales) revenues-external fell 25% year over year and 23% at cc to $265 million.

Operating Details

Non-GAAP gross margin expanded 160 basis points (bps) year over year and came in at 49%. The gross margin benefited from synergies from Red Hat acquisition, high-value software, and systems contributions.

Non-GAAP R, D&E expenses increased 12.4% year over year to $1.58 billion.

Non-GAAP selling, general and administration (S, G&A) expenses declined 6.5% year over year to $4.96 billion.

Non-GAAP pre-tax income margin from continuing operations was 12.8% compared with year-ago period’s 16.6%.

Balance Sheet & Cash Flow Details

As of Jun 30, 2020, IBM had $14.3 billion in total cash and marketable securities compared with $12 billion as of Mar 31, 2020.

As of Jun 30, 2020, total debt (which includes $21.9 billion from Global Financing debt) was $64.7 billion, compared with $64.3 billion as of Mar 31, 2020.

The company reported cash flow from operations of $3.6 billion during the second quarter, compared with $4.5 billion reported in the first quarter.

IBM generated free cash flow of $2.3 billion in the second quarter, compared with $1.4 billion reported in the first quarter.

Moreover, the company returned $1.5 billion to shareholders through dividends.

Guidance

For 2020, IBM refrained from providing any guidance, citing uncertainty stemming from coronavirus crisis.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, IBM has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% 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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