It has been about a month since the last earnings report for IBM (IBM). Shares have lost about 0.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is IBM due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
IBM Beats on Q1 Earnings, Revenues Miss Despite Cloud Demand
IBM reported relatively healthy first-quarter 2023 results, wherein the bottom line beat the Zacks Consensus Estimate. The company witnessed healthy demand for hybrid cloud and AI solutions with a client-focused portfolio and broad-based growth. However, despite top-line improvement on a year-over-year basis, revenues lagged the consensus estimate.
On a GAAP basis, net income from continuing operations was $934 million or $1.02 per share compared with $662 million or 73 cents per share in the year-ago quarter. The improvement in GAAP earnings was primarily attributable to top-line growth and lower operating expenses.
Excluding non-recurring items, non-GAAP net income from continuing operations was $1.36 per share compared with $1.40 per share in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 9 cents.
Quarterly total revenues increased to $14,252 million from $14,197 million on strong demand for hybrid cloud and AI, driving growth in Software and Consulting segments. On a constant currency basis, revenues were up 4.4% year over year. The top line missed the consensus estimate of $14,274 million.
Gross profit was $7,509 million compared with $7,335 million in the prior-year quarter, resulting in respective gross margins of 52.7% and 51.7% owing to a strong portfolio mix. Total expenses decreased to $6,451 million from $6,712 million, driven by improvements in the business mix and ongoing productivity initiatives.
Software: Revenues improved to $5,921 million from $5,772 million, driven by growth in Hybrid Platform & Solutions, Red Hat and Transaction Processing. Segment pre-tax income from continuing operations was $1,164 million compared with $1,134 million in the year-ago quarter for respective margins of 19.7% each. The company is witnessing healthy hybrid cloud adoption by clients and solid demand trends across RedHat, automation, data in AI and security.
Consulting: Revenues were $4,962 million, up from $4,829 million, led by pervasive growth driven by demand for digital transformation, growing revenues and signings at double-digit rates across all business lines and regions. Segment pre-tax income was $382 million compared with $348 million in the year-ago quarter, driven by productivity enhancement initiatives for respective margins of 7.7% and 7.2%.
Infrastructure: Revenues were $3,098 million, down from $3,219 million, as healthy demand for zSystems was more than offset by lower demand for Distributed Infrastructure and support services. Segment pre-tax income was $216 million compared with $199 million in the year-ago quarter for respective margins of 7% and 6.2%.
Financing: Revenues improved to $196 million from $154 million. Segment pre-tax income was $100 million compared with $84 million in the year-ago quarter for respective margins of 51.3% and 54.6%.
Cash Flow & Liquidity
During the first quarter, IBM generated $3,774 million in cash from operations compared with $3,248 million in the year-ago quarter. Free cash flow was $1,340 million in the quarter, up from $1,240 million in the prior-year period, driven by higher profit and working capital efficiencies. As of Mar 31, 2023, the company had $9,337 million in cash and cash equivalents with $53,826 million of long-term debt.
For full-year 2023, the company expects 3-5% revenue growth on a constant currency basis. Free cash flow is estimated to be approximately $10.5 billion.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
The consensus estimate has shifted -7.48% due to these changes.
At this time, IBM has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, IBM has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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