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Will IBM's Q4 Earnings Rise Despite Top-Line Contraction?

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International Business Machines Corporation (IBM - Free Report) is scheduled to report fourth-quarter 2021 results on Jan 24, after the closing bell. In the last reported quarter, the New York-based integrated systems provider beat the Zacks Consensus Estimate by 3 cents. The company is expected to have recorded lower aggregate revenues year over year due to a challenging macroeconomic environment and softness in traditional businesses.

Factors at Play

During the fourth quarter, IBM reinforced its alliance with Deloitte by launching a new offering — DAPPER — an AI-enabled managed analytics solution that helps organizations accelerate the adoption of hybrid cloud and AI across the enterprise. Built upon IBM's modern hybrid cloud architecture, DAPPER enables organizations to scale up operations and enable smart reporting.

IBM also collaborated with Apptio, Inc. to help clients improve hybrid cloud technology decision-making and drive the adoption of Red Hat OpenShift and IBM's open hybrid cloud approach. The collaboration will combine data-driven insights from Apptio to help clients make informed migration decisions and capitalize on the capabilities of Red Hat OpenShift to run and manage applications in the computing environment that best suits their business goals. These are likely to have driven the top-line growth in the Cloud & Cognitive Software segment.

In the fourth quarter, IBM announced a collaboration with Acclivis Technologies to deploy Cloud Satellite services across Asia to help enterprises accelerate digital innovation while maintaining data sovereignty and achieving regulatory compliance. The collaboration will see IBM leveraging the regional data center coverage of Acclivis in Hong Kong, Singapore, Malaysia, Indonesia and Thailand to host and manage data.

The company further expanded its partner relationships in AI, network automation and security to help the telecommunications industry evolve as 5G and Edge Computing take center stage. During the quarter, IBM introduced the Environmental Intelligence Suite – an environmental intelligence software that leverages AI to help organizations prepare and respond to weather and climate risks that may disrupt business and reduce the complexity of regulatory compliance and reporting. The offering will allow organizations to spend fewer resources curating complex data and analyzing it for insights and taking action to improve their operations. These are likely to have driven incremental revenues in the Global Business Services segment.

However, escalating expenses directed toward cloud platform development amid intense competition in the cloud space are likely to have eroded its margins. In addition, the company is likely to have recorded lower revenues in the Global Technology Services segment owing to challenging macroeconomic conditions induced by the fast-spreading Omicron variant of the coronavirus.

The Zacks Consensus Estimate for total revenues for the company stands at $17,568 million. It generated revenues of $20,367 million in the prior-year quarter. The consensus mark for earnings is currently pegged at $3.39 per share, indicating a healthy improvement from $2.07 reported in the year-earlier quarter.

Key Developments in Q4

During the quarter, IBM acquired SXiQ, an Australia-based digital transformation services company specializing in cloud applications, cloud platforms and cloud cybersecurity, to advance its hybrid cloud and AI strategy by helping enterprises modernize and transform complex mission-critical applications on multiple clouds and platforms. This is the 20th acquisition overall and 10th within the consulting domain since Arvind Krishna became IBM's CEO.

The company also announced plans to acquire the Adobe Workfront consulting unit and assets from Rego Consulting Corporation to further its hybrid cloud and AI strategy. Building on IBM's strategic partnership with Adobe, the consultancy specializes in work management software consulting for enterprise clients.

Earnings Whispers

Our proven model does not predict an earnings beat for IBM this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. This is not the case here.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -11.02%, with the former pegged at $3.13 and the latter at $3.51. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: IBM currently has a Zacks Rank #3.

Stocks to Consider

Here are some companies you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this season:

Qualcomm Incorporated (QCOM - Free Report) is set to release quarterly numbers on Feb 2. It has an Earnings ESP of +0.67% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for Cirrus Logic, Inc. (CRUS - Free Report) is +1.48% and it sports a Zacks Rank of 1. The company is set to report quarterly numbers on Jan 31.

The Earnings ESP for Meta Platforms, Inc. is +0.43% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Feb 2.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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