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IBM (IBM) Up 4.3% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for IBM (IBM - Free Report) . Shares have added about 4.3% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is IBM due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

IBM Beats Q2 Earnings Estimates on Hybrid Cloud and AI Demand

International Business Machines Corporation reported solid second-quarter 2022 results, wherein both the bottom and the top lines beat the Zacks Consensus Estimate.

Net Income

On a GAAP basis, net income from continuing operations was $1,465 million or $1.61 per share compared with $810 million or 90 cents per share in the year-ago quarter. The improvement was primarily attributable to higher aggregate revenues.

Non-GAAP net income was $2.31 per share compared with $1.61 per share in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 2 cents.

Quarter Details

Quarterly total revenues increased 9.3% year over year to $15,535 million, backed by strong demand for hybrid cloud and AI, driving growth in Software and Consulting. The top line surpassed the consensus estimate of $15,120 million.

Gross profit was $8,290 million compared with $7,852 million in the prior-year quarter, resulting in respective gross margins of 53.4% and 55.2%. Total expenses declined to $6,568 million from $6,940 million.

Segmental Performance

Software: Revenues improved to $6,166 million from $5,795 million, driven by growth in Hybrid Platform & Solutions and Transaction Processing. Segment pre-tax income was $1,375 million compared with $1,059 million in the year-ago quarter for respective margins of 22.3% and 18.3%. The company is witnessing healthy hybrid cloud adoption by clients, adding 250 clients in the second quarter alone, bringing the tally of hybrid cloud clients to more than 4,000.

Consulting: Revenues were $4,809 million, up from $4,378 million, led by a strong demand profile, growing revenues and signings at double-digit rates across all business lines and regions. Segment pre-tax income was $343 million compared with $270 million in the year-ago quarter for respective margins of 7.1% and 6.2%.

Infrastructure: Revenues were $4,235 million, up from $3,560 million, due to higher Hybrid Infrastructure revenues and the launch of z16 mainframe – an open, agile platform that integrates into a hybrid cloud environment with industry-leading security, data privacy and latency. Segment pre-tax income was $757 million compared with $489 million in the year-ago quarter for respective margins of 17.9% and 13.7%.

Financing: Revenues were $146 million, down from $209 million due to the challenging macroeconomic environment. Segment pre-tax income was $102 million compared with $131 million in the year-ago quarter for respective margins of 69.7% and 63%.

Cash Flow & Liquidity

During the second quarter, IBM generated $1,321 million in cash from operations compared with $2,625 million in the year-ago quarter, bringing the respective tallies for the first half of  2022 and 2021 to $4,569 million and $7,539 million. Free cash flow was $2,091 million for the quarter, up from $1,037 million in the prior-year period. As of Jun 30, 2022, the company had $7,034 million in cash and cash equivalents with $44,328 million of long-term debt.

Outlook

For full-year 2022, the company expects revenue growth at the high end of the mid-single-digit range. Free cash flow is estimated to be $10 billion, slightly narrow from earlier projections of $10-$10.5 billion due to the impact of dollar strength and winding down of business operations in Russia.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

The consensus estimate has shifted -26.6% due to these changes.

VGM Scores

At this time, IBM has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise IBM has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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