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Will Product Rollouts & Deal Wins Aid IBM's Q4 Earnings?

Zacks Equity Research

International Business Machines IBM is set to report fourth-quarter fiscal 2018 results on Jan 22. Notably, the company surpassed the Zacks Consensus Estimate in the trailing four quarters with average beat of 1.13%.

In the last reported quarter, the company delivered non-GAAP earnings of $3.42 per share, which beat the Zacks Consensus Estimate by couple of cents. Earnings per share (EPS) increased 4.9% from the year-ago quarter.

Revenues of $18.76 billion lagged the Zacks Consensus Estimate of $19.10 billion and declined 2.1% on a year-over-year basis. At constant currency (cc), revenues remained flat.

Guidance & Estimates

IBM reiterated EPS forecast for 2018. Non-GAAP EPS is expected to be at least $13.80. The Zacks Consensus Estimate for earnings is pegged at $13.81 per share, almost flat year over year.

Notably, the stock has fallen 28.1% in a year’s time, compared with the industry’s decline of 23.7%.The dismal showing can primarily be attributed to inconsistent revenue growth, slow transition to cloud, increasing competition, and softness in cognitive solutions and technology & cloud platforms.

Let’s see how things are shaping up prior to this announcement.

Factors to Consider

IBM’s initiatives in blockchain, cloud and enterprise artificial intelligence (“AI”) market through product rollouts and strategic deals bode well. Moreover, the company is benefiting from strong demand for z14 Mainframe and Power products. Its improving clout in the cloud, security and analytics remains a tailwind.

In the third quarter, Strategic Imperatives (cloud, analytics, mobility and security) grew 7% from the year-ago quarter to $9.3 billion.

The company is focusing on cloud computing which is evident from the 60 data centers across 18 availability zones, globally. Notably, cloud revenues surged 13% from the year-ago quarter to $4.6 billion.

Coming to Systems, the segment comprises both hardware and operating systems software revenues. Broad-based adoption of the z14 mainframe, power systems and strong flash sales remain key catalysts for the segment.

IBM Z revenues increased 6% year over year on more than 20% MIPS growth, driven by broad-based adoption of the z14 mainframe.

However, Cognitive Solutions’ revenues-external decreased 5.7% year over year (down 5% at cc) to $4.15 billion in the third quarter. The Zacks Consensus Estimate is currently $5.25 billion for the fourth quarter.

Additionally, in the third quarter, revenues from Global Business Services-external segment were $4.13 billion, up 0.9% from the year-ago quarter (up 3% at cc). The Zacks Consensus Estimate for the fourth quarter is pegged at $4.16 billion.

Revenues from Technology Services & Cloud Platforms-external decreased 2% from the year-ago quarter (flat at cc) to $8.29 billion. The Zacks Consensus Estimate for the fourth quarter is pegged at $9.03 billion.

Product Rollouts & Strategic Deals: Key Catalysts

IBM recently showcased IBM Q System One, the world's first integrated quantum computing system for commercial use in the CES 2019.

IBM is also benefiting from notable customer wins, especially in the sports domain of late. IBM is introducing several initiatives to boost experience of the entities involved in sports leagues, from 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 influencing players with robust strategies. These innovative solutions aided by IBM’s Watson positions the company well in gaining momentum.

Recently, IBM Integrated Analytics System or IIAS suite of analytics services were selected by Catalina. IBM is enhancing services which facilitate digital transformation to bolster customer engagement. This is anticipated to drive robust adoption and strengthen the company’s growth prospects in the domain.

Moving further, the company entered into a seven-year agreement with Juniper Networks JNPR. Per the terms of the deal, IBM Services platform integrated with automation and cognitive capabilities of Watson will be utilized by Juniper.

Moreover, in order to focus more on its hybrid cloud business, IBM entered into a definitive agreement to divest seven software products to HCL Technologies for approximately $1.8 billion.

IBM is also gaining momentum in blockchain technology. The traction witnessed by the company’s Watson Ads offering is bolstering the top line, in turn aiding IBM to better compete against peers.

While these developments are expected to positively impact results, IBM’s continuing investments and pricing pressure related to its legacy hardware business and ballooning debt levels might trouble IBM over time.

What the Zacks Model Unveils

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. The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

IBM has a Zacks Rank #3 and an Earnings ESP of -1.27%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks with Favorable Combination

Here are a few stocks that are worth considering as our model shows that these have the right combination of elements to deliver an earnings beat in the upcoming releases.

The Progressive Corporation PGR has an Earnings ESP of +1.57% and a Zacks Rank #1.You can see the complete list of today’s Zacks #1 Rank stocks here.

TD Ameritrade Holding Corporation AMTD has an Earnings ESP of +0.62% and a Zacks Rank #2.

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