What Is IBM’s 2019 Outlook After Q4 Earnings Beat?

IBM (NYSE:IBM) reported its fourth quarter earnings on January 22. Not only did the company beat expectations on revenue and earnings, it also delivered higher than expected guidance for the next fiscal year’s EPS. While IBM’s CFO was forthcoming with the company’s operational plan and expectations, the absence of the CEO on the Q4 call was a bit surprising to investors.

We are maintaining our price estimate of $146 per share for IBM, which is around 10% higher than the current market price following the post-earnings rally. Our interactive dashboard on IBM’s Price Estimate outlines our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on its valuation.

How Did IBM Perform? 

For Q4, IBM’s Cognitive Solutions revenue grew to $5.46 billion (+2% y-o-y in constant currency) and Global Business Services grew to $4.32 billion (+6% y-o-y), while Technology Services & Cloud Platforms revenue was flat y-o-y at $8.93 billion. Meanwhile, Systems revenue declined to $2.62 billion (-20% y-o-y) due to IBM Z cycle dynamics and Global Financing revenue declined to $402 million (-9% y-o-y).

IBM’s revenue growth may have hit an inflection point, while the company’s strong guidance (operating EPS of at least $13.90 for 2019, excluding Red Hat) stands out in the context of weakening global IT spending. IBM’s outlook is predicated on management’s focus on re-aligning its portfolio (thus driving operating leverage) and strong contract wins in Q4 (for example the multi-year BNP renewal) which are also likely to help manage the potential currency headwinds.

Notably, the focus of IBM’s business portfolio realignment appears to strengthen its annuity business (~60% of total IBM) versus the transactional business. Interestingly, the divestments in Cognitive Solutions appear to be aimed at revving up the growth for the segment, which houses high-end technologies currently favored by the markets. Going into 2019, the company’s management expects full-year growth to slow down by 4-5% on the back of the macro conditions.

Technology Services & Cloud Platforms remaining flat was a slight surprise, despite the broader cloud market witnessing growth. It appears that the decline was due to tougher comps on the mainframe business, excluding which the cloud business grew 19%. IBM’s management expects a headwind of 2-3% to the overall growth from divestments and currency. However, the shift towards a higher annuity business is likely to help the company achieve its EPS goals.

Other than the potential closure of the Red Hat deal, IBM did not provide much commentary around the potential upside for the combined entity. We maintain our price estimate for IBM and will be updating our expectations based on incremental data points about the revenue growth having potentially bottomed out, growth in annuity business and updates on the Red Hat deal closure.

Do not agree with our forecast? Create your own price forecast for IBM by changing the base inputs (blue dots) on our interactive dashboard.