IBM Earnings Preview: Looking For More Signs Of Recovery
Quick Take
- Revenues from Global Technology Services and Global Business Services will stabilize as the revenue mix from backlog improves.
- Its middleware division, led by Websphere and Tivoli software, will maintain its dominance.
- The server division’s results will indicate the state of global server industry in the coming quarters.
- Growth economies will be key to IBM’s revenue growth.
International Business Machines (NYSE:IBM) is set to announce its Q1 earnings on April 17. IBM’s revenue declined by 2% to $104.5 billion in 2012 from $106.9 billion in 2011. This was mainly due to negative currency impacts and the economic slowdown in Europe. In 2012, IBM reported decline in revenue across Global Technology Services (GTS), Global Business Services (GBS), Financing and System and Technology verticals. The Software vertical, which includes Middleware and Operating Systems division, was the sole bright spot and reported an increase of 3% in revenues. We expect this trend trend to reverse in 2013 as IBM delivers improved results across its verticals. IBM expects to deliver full-year 2013 GAAP earnings per share of at least $15.53 and operating (non-GAAP) earnings per share of at least $16.70.
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We expect IBM to report revenue stabilization in GBS as its various growth verticals such as business analytics, Smarter Planet and cloud bear fruit. Additionally, we expect better conversion from backlog to bolster the services revenue in both GBS and GTS. We are closely following IBM’s earning announcement for growth in server division and we also expect IBM to report better revenues from emerging markets that will stem further declines in total revenues.
What To Expect in 2013 From GBS And GTS
The Technology Services division and Business Services division contribute over 35% to IBM’s stock value according to our estimates. In 2012, GTS reported a 2% decline and GBS reported a 3% decline in revenues. However, we expect revenues from these division to stabilize in 2013. While its foray in high growth and high value business such as business analytics, Smarter Planet and cloud computing will stabilize GBS revenue, better revenue contribution from backlogs to services is expected to bolster both GBS and GTS revenue.
- In 2012, business analytics (13% growth), together with Smarter Planet (25% growth) and cloud computing (80% growth), reported the highest growth in revenue. We expect these divisions to gain further traction in 2013 as new initiatives such as SmartCloud and PureSystems for storage, security and mobility find new takers. We will be closely following new developments in these division during this earnings announcement.
- Historically, backlog contributes 70% to services revenue and we expect this mix to improve, which will drive the revenue growth. More long term contracts in backlog is the primary reason for the improvement in IBM’s revenue run rate from backlog in 2013. We expect the company to report this change in revenue mix in the upcoming earnings announcement.
Leadership In Middleware To Continue
The Middleware division, together with Operating Systems division, are the biggest contributors to IBM stock value and makes up nearly 55% of our estimate. Recently Gartner has crowned IBM as the market leader in middleware software division with 31% market share. [1]
In 2012, these two divisions reported 3% growth in revenues and the highest EBITDA margins at 48%. While we are watching Websphere and Tivoli software for growth, we would like to know more about the demand in Rational suite of software which witnessed a Y-o-Y decline of 1.6%.
New Sytem-Z To Bolster Server Division
IBM’s server division suffered a decline in 2012 due to clients’ budgetary constraints and stiff competition from DELL (NASDAQ:DELL) and HP (NASDAQ:HPQ). However, its high end System-Z server witnessed 56% revenue growth in 2012, which shows future promise.
We expect the company to report solid growth in high end System-Z servers as IBM’s clients continue to demand mainframes with high processing power and big data analytics capability. However, we are closely watching IBM’s revenue from System-x and Power system servers as Gartner and IDC are predicting better sales for x86 based server in 2013. [2] If IBM does report better revenues for its server division then this could point to the recovery in the global server industry.
Expect Growth Economies To Carry IBM
IBM reported a 7% increase in revenue from growth markets and 11% growth in revenue from BRIC nations in 2012. The company has taken a number of initiatives such as the launch of cheaper power system servers for emerging economies to strengthen its presence in these countries. We expect these markets to be a key engine of growth going forward.
We currently have a $225 Trefis price estimate for IBM, which is about 5% higher than the current market price.
Understand How a Company’s Products Impact its Stock Price at Trefis
Notes:- IBM Named Marketshare Leader in Application Infrastructure and Middleware Software for 12 Consecutive Years, April 08 2013, www-03.ibm.com [↩]
- Gartner, IDC See Server Sales Turning a Corner, April 01 2013, www.datacenterknowledge.com [↩]