IBM Earnings Preview: What We're Watching

Jan.22.13 | About: International Business (IBM)

International Business Machines (NYSE:IBM) is set to announce its Q4 earnings on January 22. The company has experienced a slight decline in revenue in the past few quarters, with a 5% y-o-y decline in Q3. This is mainly due to negative currency impacts and the slowdown in Europe. We expect the current trend to continue for the rest of the year.

In Q3, IBM reported revenue of $24.7 billion, down 5% y-o-y and the company experienced a negative currency impact of nearly $1 billion for the quarter. Net income was flat y-o-y at $3.8 billion and the EPS was up nearly 4% at $3.33. The software, services, systems and technology division revenues were down on a yearly basis, while the business analytics division revenue grew 14% y-o-y and the Smarter Planet revenue was up 20% y-o-y. The company however reiterated its full-year 2012 guidance of operating earnings per share of at least $15.10.

We expect that Big Data analytics and cloud computing services will continue to drive revenue growth the next quarter. IBM’s Sequoia, the world’s fastest supercomputer, is also expected to help the company sell its Big Data solutions. The expertise acquired by IBM in implementing low power data centers with high computing capabilities, based on Project Blue Gene is likely to drive its cloud and analytics businesses.

See our full analysis on IBM

What To Expect In 2012 and Beyond

Despite a slow quarter in terms of revenues, IBM has shown a significant increase in free cash flows that we expect, it will invest back into highly profitable, high margin businesses such as Big Data analytics and cloud services. It has raised its 2012 expectations by increasing EPS to at least $15.10 which is 10 cents more than the previous guidance of $15.

Focus On Cloud and Analytics To Help Revenues

The company’s focus on cloud computing and analytics is already paying off as these divisions have witnessed the highest revenue growth in Q3. IBM has also teamed up with AT&T to offer an integrated, end-to-end solution that provides access to cloud computing infrastructure over a secure private line provided by AT&T. This service simplifies access to the cloud and will provide IBM’s back-end services over a secure telecom connection provided by AT&T.

IBM Expanding Global Footprint

Despite companies in Europe reducing IT spending due to the eurozone uncertainty, some Central and Eastern European economies are doing well. To tap these markets, IBM has opened two new branches in Poland and two in Turkey, to tap the fast growing IT markets in these countries. The total IT market for 2012 is an estimated $9.8 billion in Poland and $9 billion in Turkey. The new offices will focus on catering to customers and partners in the small and medium-sized business sectors.

Expect Growth Economies To Carry IBM

The Americas’ Q3 revenues were $10.4 billion, a decrease of 4% y-o-y while revenues from Europe/Middle East/Africa were $7.2 billion, down 9% y-o-y and Asia-Pacific revenues increased 1% to $6.5 billion. Revenues in the BRIC countries - Brazil, Russia, India and China - increased 4%. We expect this trend to continue in Q4.

We currently have a $230 Trefis price estimate for IBM, which is about 20% higher than the current market price.

Disclosure: No positions.