For investors in International Business Machines (NYSE:IBM), the company’s ongoing transition has truly created a tale of two companies. The first is one that suffers from a slowing legacy software business and dependence on hardware upgrade cycles. The second is IBM’s strategic imperatives, a group of fast-growing, high-margin businesses like cloud computing, data analytics, and cybersecurity. The company has been gradually working to reduce its reliance on the former while it invests aggressively in the latter.
IBM will have another opportunity to convince shareholders that the transition is gaining steam when the company reports the financial results of its just-completed first quarter after the market close on Tuesday, April 16. Let’s recap the company’s fourth-quarter results and look into recent events to see if it provides any insight into what investors should look for when IBM reports earnings.
No big surprises
IBM closed out 2018 with solid, though unremarkable, results. For the fourth quarter, the company produced revenue of $21.8 billion, down 3% year over year, and adjusted net income of $4.4 billion (which excluded $1.9 billion in tax-related charges). This resulted in adjusted earnings per share of $4.87. Revenue suffered from foreign currency headwinds, and adjusting for those differences, revenue would have been down just 1% year over year. Another factor pressuring the results was a decline in systems revenue, as the upgrade cycle for the IBM Z server was drawing to a close.
Strategic imperatives performed much as expected. The group of high-tech businesses generated revenue of $11.5 billion, producing 53% of IBM’s revenue during the fourth quarter and 50% for the full year. The company reported double-digit growth in key areas like analytics, cybersecurity, and cloud computing, though the slowing server refresh cycle pinched results. IBM’s growth will be highly dependent on the company’s success in cultivating its strategic imperatives.
The company announced at the IBM Think 2019 conference that it was making a bigger bet on cryptocurrency and its underlying blockchain technology. IBM’s head of blockchain solutions, Jesse Lund, revealed that an estimated 40 to 50 banks were expected to participate in the IBM World Wire Service in the coming years. The service is working to address the slow and expensive process of moving money across borders using blockchain technology to reduce the cost and complexity.
“Our goal is to continue to expand that network and to provide global coverage within three to five years,” Lund said, “where you can actually send remittances in a consistent way, immediately, at a very low cost, from anywhere in the world to anywhere in the world.” A number of banks had already expressed interest in the soon-to-be-launched service. While this could potentially be a big revenue generator in the future, it likely won’t affect IBM’s results in the current quarter.
What the quarter might hold
IBM only provides broad strokes when it comes to guidance, and it doesn’t provide quarterly targets. For 2019, management is forecasting diluted earnings per share of at least $12.45 and adjusted earnings per share of at least $13.90. The difference between the two is related to the company’s recent acquisition of Red Hat and tax charges. IBM is also guiding for full-year cash free flow of $12 billion.
This doesn’t stop Wall Street from taking its best guess at what the results will be for the quarter. While investors don’t want to get caught up in short-term thinking, these expectations can help provide context regarding investors’ overall sentiment toward the company. Analysts’ consensus estimates are calling for revenue of $18.53 billion, a decline of 2.8% year over year, and earnings per share of $2.23.
The most highly watched metric will likely be the percentage of revenue generated by IBM’s strategic imperatives, as the company moves to embrace its high-tech future. We’ll know more when IBM reports earnings on Tuesday, April 16.