IBM Corp. is expected to show a decline in fourth-quarter sales when it reports earnings after the market closes Thursday, as it continues to suffer through what has been a painful transition to a cloud-based software-as-a-service business.
The company, which has been moving its business to a software-centric model from selling hardware in the past, has surpassed top- and bottom-line expectations every quarter this fiscal year, but earnings growth has been on a downtrend for two-and-a-half years.
Also see: IBM plans to hire 25,000 workers over the next four years
IBM IBM, +0.33% may meet fiscal 2016 expectations because of its stronger-than-expected quarterly earnings this year, but Credit Suisse analyst Kulbinder Garcha warned in a note to clients this week that eroding software sales may weigh on its fiscal 2017 guidance.
“We believe that a reset of expectations is looking increasing likely,” he said.
Here’s what to expect:
Earnings: Sell-side analysts surveyed by FactSet expect IBM to report a profit of $4.88 a share, compared with $4.84 in the year-earlier period. Contributors to Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages and buy-side analysts to predict earnings, expect IBM to report $4.93 a share. IBM has surpassed the FactSet consensus estimate for eight straight quarters.
Here’s what Trump means for the tech industry
(1:34)The incoming Trump administration has given Silicon Valley a headache, mainly due to potential plans to penalize companies that manufacture goods in China. But not all of Trump’s proposed policies may have a harmful effect on the tech sector.
Revenue: Big Blue is expected to report revenue of $21.6 billion, compared with $22.1 billion in the year-earlier period, according to the FactSet consensus estimate. Estimize contributors are forecasting revenue of $21.7 billion. The company has surpassed both consensus estimates the past three quarters, but it had a long string of misses before that. From September 2011 to December 2015, IBM missed the FactSet guidance in 16 of 18 quarters.
Stock reaction: Shares of IBM have risen 8% in the past three months and nearly 29% in the past year, performing in-line with the Dow Jones Industrial Average, which is up 10% in the past three months and 24% in the past year. The average rating on IBM’s stock is the equivalent to hold, while the average price target of $156.55 implies a 6.5% decline from Friday’s closing price. Among the more bullish brokerages is Stifel Nicolaus, which last week raised its target to $192 from $165.
What to watch for: While IBM has been putting greater emphasis on its software and services businesses, both of those units saw large declines in 2015 and are expected to show continued distress through IBM’s recent quarter. IBM’s Global Technology Services segment revenue fell 7% in the fourth quarter of 2015, while Global Business Services revenue tumbled 10%. Software revenues plunged 11%.
Credit Suisse, which has an underperform rating and $110 price target on the stock, said the software revenue decline “could be worsening,” and estimated software would fall another 4.5% year-over-year. He further suggested that IBM’s transition to a software-as-a-service business may be dilutive to earnings per share because it continues to lack meaningful scale.
“We see little inflection within the business fundamentals and specifically see the structural profitability may continue to erode,” said Garcha.
Analysts at Estimize said IBM continues to suffer from the downturn in the PC market, declines in corporate IT spending and fierce competition in cloud services from companies such as Amazon.com Inc. AMZN, -0.91% , Microsoft Corp.MSFT, -0.27% and Alphabet Inc. GOOGL, -0.42% GOOG, -0.40% .
Estimize said “it won’t be surprising” if IBM fails to post positive growth for what would be the 11th straight quarter, and suffers a share decline in-line with its historical average of 3% or more.
[Source:-Marketwatch]