IBM (IBM) Up 1% Since Last Earnings Report: Can It Continue?

It’s been about a month since IBM’s (IBM) last earnings report. Shares rose about 1% in that time, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is IBM facing a pullback? 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 better understand the important catalysts.

IBM’s first quarter earnings Beat, nevertheless Miss revenues Solid demand

IBM started 2024 on a positive note with relatively modest first-quarter results. Financial results beat the Zacks Consensus Estimate, but the top line didn’t stay the same despite strong demand. The company has seen strong trends in demand for hybrid cloud and artificial intelligence solutions thanks to its customer-centric portfolio and broad-based growth, and remains on track to achieve its 2024 goals.

Net income

On a GAAP basis, net income from continuing operations was $1,575 million, or $1.69 per share, compared to $934 million, or $1.02 per share, in the prior-year quarter. The improvement in GAAP earnings is primarily attributable to revenue growth and income tax benefits.

Excluding non-recurring items, non-GAAP net income from continuing operations was $1.68 per share compared to $1.36 in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 9 cents.

Quarter details

Total quarterly revenue increased to $14,462 million from $14,252 million on strong demand for hybrid cloud and artificial intelligence, driving growth in its software and consulting segments. At constant exchange rates, revenues increased by 3% year-on-year. The top result missed the consensus estimate of $14,572 million.

Gross profit increased to $7,742 million from $7,509 million in the prior-year quarter, resulting in gross margins of 53.5% and 52.7%, respectively, thanks to strong portfolio diversification. Total costs increased to $6,669 million from $6,451 million, driven by higher interest costs and research and development costs.

Segment efficiency

Software: Revenue increased to $5,899 million from $5,591 million, driven by growth in the areas of platform and hybrid solutions, Red Hat, automation, data and artificial intelligence and transaction processing. Reported segment revenue missed our estimate of $5,998 million despite solid hybrid cloud traction. Segment pre-tax income from continuing operations was $1,500 million compared to $1,379 million in the prior-year quarter with margins of 25.4% and 24.7%, respectively. The company is witnessing healthy customer adoption of hybrid cloud and solid demand trends in RedHat, Automation, and Data & AI.

Consulting: Revenue was $5,186 million compared to $5,197 million a year ago, driven by pervasive growth driven by demand for digital transformation driving revenue growth across most business lines and regions. Segment revenues exceeded our estimates of $5,340 million. The segment’s pre-tax income was relatively flat at $424 million, representing a margin of 8.2%.

Infrastructure: Revenue was $3,076 million compared to $3,098 million as lower demand for support services was partially offset by higher demand for hybrid and distributed infrastructure. Pre-tax segment revenue was $311 million compared to $307 million in the prior-year quarter with margins of 10.1% and 9.9%, respectively.

Financing: Revenues remained almost unchanged at $193 million. Pre-tax segment revenue was $92 million compared to $100 million in the prior-year quarter with margins of 47.7% and 51.2%, respectively.

The story continues

Cash flow and liquidity

In the first quarter, IBM generated $4,168 million in cash from operations, compared to $3,774 million in the same quarter last year. Free cash flow was $1,910 million for the quarter, compared to $1,340 million in the prior-year period, driven by higher earnings and working capital efficiency. As of March 31, 2024, the company had cash and cash equivalents of $14,603 million and long-term debt of $54,033 million.

Perspectives

The company maintained its full-year 2024 revenue growth expectations in the mid-single digits at constant currency. Free cash flow is expected to be approximately $12 billion.

How have estimates changed since then?

Investors have witnessed a downward trend in estimate revisions over the past month.

Due to these changes, the consensus estimate moved -5.19%.

VGM results

At this point, IBM has a solid Growth Score of B, although well behind its Momentum Score of F. However, the company’s stock is rated a C on the value side, ranking in the middle 20% for this investment strategy.

Overall, the stock has a Total VGM Score of C. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for this company are generally on a downward trend, and the magnitude of these revisions indicates a downward shift. Notably, IBM carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

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