IBM Earnings Preview: Revenues Expected To Decline In Q2

by Trefis Team
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IBM (NYSE:IBM) is set to report its Q2 2017 earnings on July 18th. For Q2, we expect that the revenue will continue to decline as it did in Q1 due to a shift to cloud services as well as currency headwinds. In Q1, IBM reported (on an adjusted basis) a 2% year-over-year decline in revenues to $18.15 billion. Furthermore, the consolidated gross margin declined by 370 basis points to around 43%. However, revenue from its Strategic Imperatives grew to $7.8 billion in the first. Over the last twelve months, these imperatives, which include revenue generated from analytics, cloud, mobile computing, security and social media, contributed 42% of IBM’s total revenues. These solutions contribute the most to Cognitive Software solutions. We expect that this trend continued in Q2.

Despite the growth in Strategic Imperatives, IBM’s Technology Services & Cloud and Global Business Services (GBS) segments have reported weaker results over recent quarters as the transition to cloud services is impacting the implementation of traditional packaged applications. Additionally, the server hardware business has also not fared well, as both of its server lines are in a later stage of the product life. Furthermore, the storage business will likely post another quarter of disappointing results as the secular changes in the industry impact revenues. Nevertheless, inorganic growth in storage revenues through the acquisition of Nimble Storage will likely add to the top line in Q2. As a result of the aforementioned factors, we expect the company’s revenues for Q2 will decline. Our take on the expected results is below.

See our full analysis for IBM

Cognitive Solutions Segment To Witness Steady Growth

IBM’s Cognitive Solutions segment includes Solutions Software (roughly two-thirds of the segment business) and Transaction Processing Software (the remaining third). According to our estimates, Cognitive Solutions software makes up nearly 45% of IBM’s value. The segment includes many of the company’s strategic areas, including analytics, commerce, and security, as well as several of the new initiatives around Watson, Watson Health, and Watson Internet of Things. This division has fared well, driven by high single-digit growth in Strategic Imperative revenues. Furthermore, Watson solutions for analytics, one of the chief drivers for Cognitive Solutions, is witnessing robust growth even as the company expands its portfolio of services to new domains such as Internet of Things (IoT). We expect these trends to drive revenue growth in Q2.

However, the company has posted declines in transaction processing software revenues as the transition to the Software as a Service (SaaS) model continues. This transition to the cloud will continue to impact revenue growth in Q2 despite the expected improvement in the number of subscription licenses sold.

Technology And Cloud Services Revenues To Improve Marginally

The Technology and Cloud Services business accounts for about 21% of IBM’s value, according to our estimates. This division is focusing on the hybrid cloud domain, with Infrastructure Cloud Services revenue being the primary offering for the division.

IBM’s clients are signing large Infrastructure Cloud Service deals with embedded cloud and mobile initiatives, to create large-scale hybrid IT environments (Hybrid Clouds). These deals have had high contract values in recent quarters and continue to drive revenue growth for the company. In the previous quarter, the company failed to close some of these deals. This led to a decline in revenues in the previous quarter. However, we believe that the company did close some of these deals in Q2, and the division should post mild revenue growth in Q2.

At present, we have a $163 price estimate for IBM, which is slightly higher than the current market price.

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