IBM has previously said it expects annual growth to return to the mid-single-digits range, starting this year.
David Paul Morris/Bloomberg
IBM will report fourth-quarter earnings after the close of trading Monday, its first financial update since completing the spinoff of Kyndryl, its former IT managed- services business.
Part of a multiple-step process by IBM (ticker: IBM) CEO Arvind Krishna to reset the company on a path of reliable topline growth, the Kyndryl deal was completed in the middle of November. The timing could lead to confusion about the numbers for the quarter and on adjusted data for earlier periods.
Adjusted for the Kyndryl (KD) spinoff, the Street is projecting fourth-quarter revenue of $16.1 billion, up about 2.5% from the adjusted year-ago level of $15.7 billion. The Street sees non-GAAP profits from continuing operations for the quarter of $3.14 a share, up from a spin-adjusted $1.88 a share a year earlier. IBM has said fourth-quarter revenue would be reduced by 1 or 2 percentage points due to unfavorable currency exchange rates.
IBM has previously said it expects annual growth to return to the mid-single-digits range, starting this year. The company expects over time that it will post high single-digit growth in consulting, mid-single-digit growth in software and flat revenue from hardware, rising and falling with product cycles.
IBM is likely to provide more detailed guidance on the outlook for 2022, in what could be the element of the report with the most impact. The Wall Street consensus calls for revenue of $59.8 billion, with profits of $10.09 a share.
Effective this quarter, the company is rolling revised segment reporting. The business is divided into Software, which used to be called cloud and cognitive software; Consulting, formerly known as Global Business Services; and Infrastructure, which includes hardware, storage, and related support.
Evercore ISI analyst Amir Daryanani said in a recent note that all eyes will be on 2022 guidance. The Software segment could track a little below management’s long-term target, given weakness in the company’s transaction processing business, but that Consulting should its goal of growth in the high single digits, the analyst said. Hardware should show growth this year as a new mainframe cycle gets rolling, Daryanani predicted.
“We think IBM post-Kyndryl should be a much more agile and profitable asset that is better positioned to grow consistently, however we believe consensus March quarter revenue estimate appears high as mainframe refresh benefits likely won’t kick in until Q2,” he said. Daryanani kept the stock at In Line with a target of $140 for the price.
Shares closed Friday at $129.38, down 1.1%, while the S&P 500 fell 1.9%.
Stifel analyst David Grossman says a flurry of recent moves by Krishna and his team—the spinoff of Kyndryl and now the pending sale of Watson Health, expanded channel partnerships, a new sales compensation plan, and continuing acquisitions—should begin to pay off in 2022. He is projecting 6% topline growth, though the figure would be flat to up 1% excluding gains tied to exiting Kyndryl and other one-time factors.
Grossman contends that IBM’s rich 5% dividend yield suggests the market thinks IBM will remain in secular decline, no matter what Krishna does, and that current free cash flow levels aren’t sustainable. Grossman disagrees.
“While risk is elevated, given slower than expected revenue stabilization, we believe the risk/reward remains attractive, given very negative market sentiment and several potential catalysts over the next 12 months, which could drive both estimates and the multiple higher,” he wrote. Grossman has a Buy rating and a $145 target price.
Write to Eric J. Savitz at [email protected]
