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Ahead of IBM's Q4 Earnings: Cloud, GBS & Systems in Spotlight

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International Business Machines Corporation (IBM - Free Report) is scheduled to release fourth-quarter 2020 results on Jan 21, 2021.

The company’s fourth-quarter results are likely to reflect solid adoption of hybrid cloud, Watson, and blockchain platforms.

Additionally, digital transformation wave has bolstered adoption of cloud-based QRadar, and Identity and Trust services, and CloudPak for Security offerings.

Notably, in the third-quarter earnings conference, management had stated that fourth quarter is a seasonally strong quarter.

Click here to know how the company’s overall fourth-quarter performance is expected to be.

Synergies from Red Hat Buyout to Favor Cloud Business

Solid uptick in the company’s hybrid cloud computing capabilities, mobile, analytics, cognitive technologies and AI related solutions is expected to get reflected in fourth-quarter revenues.

Particularly, synergies from Red Hat acquisition are likely to have contributed to Cloud & Cognitive Software segment’s revenues. Markedly, revenues from Red Hat in third-quarter 2020 improved 16% (at cc) on a normalized basis. Currently, more than 2,600 clients are utilizing Red Hat and IBM’s hybrid cloud platform. Furthermore, in the third quarter, the company added 125 IBM Services clients that are leveraging Red Hat technology.

Management is optimistic about enhancing utility of hybrid cloud services based on architecture built by IBM and Red Hat. In fact, IBM has been leveraging OpenShift container platform to enable clients to upscale business operations in a secure manner via AI-powered Cloud Paks. Also, management has been banking on advancement in Red Hat “actual backlog growth.”

Moreover, the company’s spin-off of its legacy Managed Infrastructure Services business in an attempt to facilitate digital transformation of clients is a testament to IBM’s efforts to accelerate its hybrid cloud growth strategy.

Notably, the Zacks Consensus Estimate for Cloud & Cognitive Software segment’s revenues-external in the fourth quarter is pegged at $7.299 billion, indicating sequential growth of 31.4%.

Cloud Paks Strength to Aid GBS Segment

Robust pipelines across hybrid cloud and data platform, AI solutions, in Cognitive Apps business driven by strength in Cloud Paks and Security, cloud-based transformation services in the Global Business Services (GBS) segment, and App modernization offerings, might have favored fourth-quarter performance.

Notably, the Zacks Consensus Estimate for GBS segment’s revenues-external in the fourth quarter is pegged at $4.076 billion, indicating sequential growth of 2.8%.

Adoption of z15 to Boost Systems Segment

The company’s fourth-quarter performance is likely to reflect gains from rapid uptake of IBM z15. Also, segmental revenues pertaining to cloud may have favored results in the quarter to-be-reported.

Notably, the Zacks Consensus Estimate for Systems segment’s revenues-external in the fourth quarter is pegged at $2.079 billion, indicating sequential growth of 65.4%.

Other Notable Factors

IBM, currently carrying a Zacks Rank #3 (Hold), is likely to have gained from improvement in adoption of blockchain solutions, including World Wire, Farmer Connect and Food Trust platforms, and quantum computing systems and services in the fourth quarter. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Nevertheless, increasing expenses on enhancing cloud platform amid stiff competition from Microsoft (MSFT - Free Report) Azure, Amazon’s (AMZN - Free Report) Amazon Web Services and Oracle’s (ORCL - Free Report) Oracle Cloud, might have weighed on IBM’s profitability in the quarter to be reported.

Moreover, the coronavirus induced crisis, may have hindered business prospects in the fourth quarter, due to restricted economic activity and decline in IT spending globally. Notably, the pandemic induced macroeconomic impacts might have hindered the adoption of Consulting, Application Management and Technical Support Services in the fourth quarter.

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