What To Expect From IBM’s Third Quarter Earnings

by Trefis Team
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IBM (NYSE:IBM) is scheduled to report its third quarter 2018 earnings on October 16. The tech giant has reported revenue growth this year after witnessing mixed results and revenue declines in the preceding quarters. Through the first half of the year, IBM has reported a steady 4% increase in net revenues to $39.1 billion, which was offset by slightly lower gross margins. While most core segments reported modest 3% growth in revenues in this period, IBM’s Systems revenues jumped 16% in the six-month period ended June. Going forward, we expect IBM’s core business segments including Technology Services & Cloud, Business Services, Cognitive Solutions and Systems to continue to drive growth. Furthermore, we also expect net income and EPS to be up in the low-single digits through the end of the year. We have summarized our Q3’18 expectations, based on the company’s guidance and our own estimates, on our interactive earnings preview dashboard for IBM. If you think differently, you can change expected segment revenue, gross margin and net income margin for IBM to gauge how changes will impact its expected EPS for the quarter.

Key Growth Trends

A key growth area for IBM in recent years has been its Cognitive Solutions segment, while the company’s core Technology Services and Business Services segment revenues have largely stagnated. Global Business Services revenues have declined 2-3% in the last few years despite an increase in new signings. Similarly, Technology Services and Cloud Platforms revenue, which includes infrastructure services, technical support services, and integration software, also declined in low single digits through 2017. However, the trend has been somewhat different this year.

Global Business Services revenues have rebounded to low single digit growth (+3%) through the first half of the year to nearly $8.4 billion. Additionally, Technology Services and Cloud revenues have also increased at a similar pace  (+4%) through the six-month period to $17.2 billion. We expect these segments to continue to report low single digit growth through the end of the year. On the other hand, Cognitive Solutions revenues have slowed down to 3% revenue growth this year due to tougher year-over-year comparisons. We expect these trends to continue in Q3 as well. The key growth segment for IBM is likely to be Systems, which should continue to witness strong demand for all three offerings including IBM Z, Power and Storage. The company has reported strong growth across these sub-segments and a meaningful increase in market shares across these domains.

Going forward, revenue growth is expected to be slightly offset by a limited increase in gross profit margins, mainly due to the change in revenue mix (for instance Systems is a lower-margin business than Cognitive Solutions or other cloud-based offerings). Consequently, the company’s net income and EPS are expected to be only around 2-3% higher on a y-o-y basis to $3.1 billion and $3.40 for the quarter, respectively. Our forecasts are slightly higher than the consensus EPS.

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