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Will IBM's Deal Wins & Cloud Offerings Aid Q2 Earnings?

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International Business Machines (IBM - Free Report) is set to report second-quarter fiscal 2019 results on Jul 17.

Notably, the company has an average positive earnings surprise of 1.3% in the trailing four quarters. In the last reported quarter, IBM delivered a positive earnings surprise of 1.8%.

Past-Quarter Performance

In the last reported quarter, the company delivered non-GAAP earnings of $4.87 per share, which surpassed the Zacks Consensus Estimate of $2.21. However, earnings per share (EPS) decreased 8.2% from the year-ago quarter.

Revenues of $18.18 billion missed the Zacks Consensus Estimate of $18.52 billion and declined 4.7% on a year-over-year basis. At constant currency (cc), the metric fell 0.9%.

What to expect in Q2?

The Zacks Consensus Estimate for second-quarter earnings is pegged at $3.06, unchanged for the last 30 days. This reflects a fall of about 0.7% from year-ago earnings. For quarterly sales, the consensus mark stands at $19.11 billion, suggesting a decline of 4.5% year over year.

IBM expects non-GAAP EPS of $13.90 for 2019. The Zacks Consensus Estimate for earnings is pegged at $13.89 per share, up 0.6% from the prior-year figure.

Notably, currency fluctuation and headwinds from IBM Z product cycle can weigh on to-be-reported quarterly results. Further, softness in the emerging markets of Asia Pacific is likely to impact the top line.

IBM Closes Red Hat Acquisition

IBM has completed the acquisition of Red Hat for $34 billion in cash. The deal is part of the company’s efforts to bolster Open Hybrid Architecture Initiative. Consequently, Red Hat shareholders will obtain $190.00 per share in cash.

The deal marks IBM’s largest acquisition ever and the combined company is likely to alter the dynamics of “the cloud market for business.” Specifically, IBM hopes to leverage Red Hat to help it become the world’s largest hybrid cloud platform provider.

The company anticipates Red Hat buyout to improve revenue growth by approximately at a CAGR of two points over a five-year period. IBM also anticipates Red Hat buy to aid it in sustaining robust dividend growth.

The deal is anticipated to intensify the cloud war since IBM’s Hybrid Cloud is well poised to gain from sturdy business model of Red Hat and its robust capabilities in providing hybrid cloud technology solutions.

Factors Likely to Influence Q2 Results

IBM is likely to benefit from significant investments in Strategic Imperatives — cloud computing, mobile, security, analytics, cognitive technologies and AI in the to-be-reported quarter.

Deal wins strengthen the company’s prospects in the Cloud Computing space. IBM and Cloudera have recently entered into an agreement to built go-to-market initiative, which is aimed at bringing big data and AI solutions to users across the open Apache Hadoop ecosystem.

Further, IBM and Trifacta have also entered into an agreement to jointly develop a new data preparation tool called InfoSphere Advanced Data Preparation. The solution is aimed at bringing big data, machine learning and AI solutions to users thereby easing there DataOps and accelerating the process.

Through these agreements IBM will provide clients an open platform that helps in accelerating analytics, business processes, data processing and predictive capabilities. Consequently, the agreement will improve business performance of its clients.   We believe IBM’s portfolio strength will help in expanding customer base and aid the to-be-reported quarter’s results.

Furthermore, IBM has witnessed growth in industry verticals like health, key areas of analytics and security in the second quarter. Watson Health witnessed broad-based growth in Payer, Provider, Imaging and Life Sciences domains. This momentum is likely to reflect in the to-be reported quarter’s results.

Additionally, the company leverages Hyperledger technology and is an early bird when it comes to providing enterprise blockchain applications. IBM recently rolled out next-gen of IBM Blockchain Platform which is anticipated to aid it in sustaining leading position in the enterprise blockchain market. Moreover, the company is involved in numerous pilot projects to explore the use of blockchain tech. IBM’s strong foothold in this space is likely to aid the company in the upcoming quarterly results.

The company’s expanding portfolio is also noteworthy. During the to-be-reported quarter, the company has made IBM Power Systems Virtual Servers accessible via IBM Cloud. IBM alsoupdated Watson Studio with AutoAI capabilities. Notably, IBM is leaving no stone unturned to strategically infuse AI capabilities across its offerings, which hold promise. AutoAI is anticipated to improve adoption of IBM Watson Studio services, consequently aiding the company’s top line in the second quarter and in the days ahead.

IBM is also benefiting from notable customer wins, especially in the sports domain of late. The company is introducing several initiatives to bolster experience of the entities involved in sports leagues, from players, coaches to fans and management.

The company’s bid to integrate AI into sports systems is in sync with its strategy to go beyond fan engagement to influence players with robust strategies. These innovative solutions aided by IBM’s Watson positions the company well in gaining momentum.

While these developments are expected to positively influence results, IBM’s continued investments and pricing pressure related to its legacy hardware business, and ballooning debt levels remain headwinds.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

IBM has an Earnings ESP of 0.00% and a Zacks Rank #3.

Stocks to Consider

Here are some stocks which you may consider as our model shows that these have the right combination of elements to post an earnings beat in its upcoming release:

The Progressive Corporation (PGR - Free Report) has an Earnings ESP of +1.04% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Netflix, Inc. (NFLX - Free Report) has an Earnings ESP of +5.99% and a Zacks Rank #3.

AT&T Inc. (T - Free Report) has an Earnings ESP of +0.46% and a Zacks Rank #3.

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