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International Business Machines (NYSE:IBM) is set to announce its Q1 earnings Wednesday, April 16. In the fourth quarter of 2013, the company reported a decline in revenue due to currency headwinds and weaker demand from growth markets. This decline was further accentuated by under-performance of the system and technology division, which is facing product transitions and market disruptions. During Q4, the revenues declined by 5% year-on-year to $27.7 billion. However, the company reported 6% growth in net income to $6.2 billion largely due to a number of factors that lowered its effective tax rate.

While its core software business witnessed mid-single-digit growth due to 4% year-over-year growth in middleware revenues, its Global Technology Services (GTS) revenues declined by 1% to $9.5 billion. However, cloud computing and analytics initiatives buoyed Global Business Services (GBS) division revenues, which grew by 4% year-over-year in constant currency to $4.6 million. We expect that IBM will continue to report growth for the software segment and GBS revenues in Q1. Additionally, we expect order backlog to improve, which will boost revenues in the future. Furthermore, as IT spending rebounds in 2014, we expect the company to report growth in revenues from emerging economies, which reported a lackluster performance in previous quarters. However, GTS revenues will continue to disappoint as the company undertakes contract restructuring. We also expect its system and technology division to report another quarter of disappointing results as the company is refreshing its product offering, and demand for its product remains low.

Middleware To Grow

The Middleware and the operating systems divisions are the biggest contributors to IBM's stock value, together making up nearly 55% of our estimate. This division continues to report good growth on the back of strong brand recognition of its suite of software such as Tivoli, Rational and Websphere etc. While we expect this division to report another quarter of growth, we are closely monitoring the growth in new licenses for different middleware software during this earnings announcement. We expect the company to report another successful quarter of Middleware revenue growth.

Revenues From GTS To Remain Tepid

According to our estimates, the Global technology service division makes up 23% of IBM's stock value. Revenues from this division have declined over the past few quarters as a result of contract restructuring and decline in outsourcing backlog. We expect this trend to have continued in the first quarter, which likely produced a decline in revenues. However, we expect the outsourcing backlog to improve in 2014 as demand for IT spending picks up, and the company signs more long-term high margin outsourcing contracts.

New Initiatives To Bolster GBS Revenues

The business Services division (GBS) contributes over 11% to IBM's stock value according to our estimates. In Q4 2013, GBS reported a 4% year-over-year growth in revenue to $4.7 billion, buoyed by growth in Business Analytics (9% growth), Smarter Planet (20% growth) and Cloud (69% growth). We expect this trend to power GBS revenues in Q1 and contribute more to the top line performance going ahead.

Server Revenues Under The Scanner

Server and storage division, which was once the cash cow of the company, is witnessing a continuing decline in revenues. The company announced the sale of its x86 server business to Lenovo in Q1 in a transaction that is expected to close later in the year. Its remaining server businesses - including z-Systems mainframes, the Power line, and its range of high performance computing platforms - each face market transitions that leave them challenged, at present. However, with the quarterly results, the company should provide some insight of the prospect for improvement in these businesses.

We currently have a $230 Trefis price estimate for IBM which is about 15% higher than the current market price.

Disclosure: No positions.

Source: IBM Earnings Preview: Focus On Revenues For Indications Of Future Growth