IBM Reports Earnings Tuesday. What to Expect.

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When

IBM

reports first-quarter earnings on Tuesday, Wall Street will be focused on the growth rate of the tech giant’s software business—and any hints on the early progress on the company’s latest generation of mainframe computers.

Wall Street projects IBM (ticker: IBM) will post revenue of $13.8 billion, with profits of $1.40 a share for the March quarter. In the year-ago period, IBM reported revenue of $17.7 billion, but that was before the company completed the spin off of

Kyndryl

(KD), IBM’s former IT services management business. On an adjusted basis, revenue should be up about 5% from a year earlier. 

In an analyst meeting last fall, IBM said that going forward it expects high-single-digit percentage growth from consulting; mid-single-digit growth from software, including high-teens growth from its Red Hat open-source software unit; and flattish growth from infrastructure, which includes mainframes. 

Last quarter, IBM provided investors with two years of historic segment data restated for the Kyndryl spin. Based on those comparisons, the Street is expecting software revenue in the first quarter of $5.63 billion, up 5.8%; consulting revenue of $4.6 billion, up 8.7%; and infrastructure revenue of $3.1 billion, down from $3.3 billion a year earlier. The infrastructure decline is no surprise—as was widely expected, IBM launched its new Z16 mainframe in early April.

In the December quarter, revenue of $16.7 billion marked a 6.5% increase, or 8.6% in constant currency, compared with last year’s spin-adjusted results—the company’s best growth quarter since 2011.

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BMO Capital analyst Keith Bachman, who has a Market Perform rating and $148 target price on IBM shares, is “intrigued with IBM’s valuation,” but isn’t convinced the company can hit its growth target for the software business without some additional acquisitions, he writes. “While we believe that Red Hat can maintain mid-teens type of growth, we have less confidence in the balance of the portfolio,” he writes in a research note previewing the quarter.

As Barron’s outlined late last year, IBM CEO Arvind Krishna has been re-engineering IBM, focusing on a return to sustainable growth after a long period of stagnancy. In particular, the company has been focused on sharpening its focus and boosting margins. IBM is now focused on two primary areas: artificial intelligence and hybrid clouds, which act as an intermediary among the crowded landscape of public clouds, private clouds, and on-premise data centers.

IBM shares are down 5.3% year to date as of Thursday’s close.

Write to Eric J. Savitz at [email protected]