What To Expect From IBM After Profit Margins Miss Estimates

by Trefis Team
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IBM (NYSE:IBM) announced its Q1 2018 earnings on April 17, reporting a 5% increase in net revenues to $19.1 billion. The tech giant reported modest mid-single digit growth across segments, which was offset by slightly lower gross margins. While revenue growth was in line with our expectations, profit margins were lower than our estimates as well as market estimates. In terms of positives, IBM reported growth in mature revenue streams such as Global Business Services (GBS) and Technology Services & Cloud Platforms (TSCP). However, the company’s higher-growth revenue stream, Cognitive Solutions, slowed down to 6% growth for the quarter.

In addition, SG&A expenses were up over 8% on a y-o-y basis to nearly $5.5 billion. As a result of high operating expenses through the quarter and lower gross margins, both operating income (non-GAAP) and net income were flat over the comparable prior year period. Consequently, the company’s non-GAAP diluted EPS stood at $2.45, only 10 cents higher on a y-o-y basis.

See Full Analysis For IBM Here

Future Outlook

Going forward, we expect the company to sustain mid-to-high single digit growth in revenues through the year, largely driven by Cognitive Solutions. It should be noted that Cognitive Solutions has not only been a high revenue growth segment for IBM, it also has the highest gross margins (~76%), as compared to the company-wide gross margin of around 43%. As a result, it is important for this segment to continue to drive growth for the company in the coming quarters. We expect IBM’s diluted EPS for the full year to be around $14, which is slightly higher than the consensus estimate.

We have summarized our full year expectations for IBM, based on the company’s guidance and our own estimates, on our interactive dashboard platform. If you think differently, you can change expected segment revenue, EBITDA margin and net income margin for IBM to gauge how changes will impact its expected EPS.

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