IBM Sales Slump Expected to Continue -- Earnings Preview

By Asa Fitch

International Business Machines Corp. is expected to report second-quarter earnings after the market closes Wednesday. The results follow several quarters of declining revenue, although the company is betting the recently closed $34 billion acquisition of open-source software firm Red Hat Inc. will help revive its fortunes. Here's what to expect:

EARNINGS FORECAST: Analysts surveyed by FactSet expect IBM to report adjusted earnings of $3.08 a share, the same as the results a year before. A year ago, the company reported $2.83 billion in net income.

REVENUE FORECAST: IBM is expected to report $19.17 billion, which would mark the fourth consecutive year-over-year decline in quarterly sales.

WHAT TO WATCH:

-- SALES WOES: Chief Executive Ginni Rometty has struggled to keep IBM revenue growing as artificial intelligence, blockchain technology and other new areas of focus haven't offset declines in legacy businesses such as computing infrastructure services. Revenue fell year-over-year for 22 quarters in a row after Ms. Rometty took over IBM in 2012. A three-quarter spell of rising sales that began in late 2017 proved temporary. Investors now are looking for fresh signs of a turnaround after the company's first-quarter revenue fell short of analysts' expectations.

-- RED HAT FUTURE: The recently closed acquisition of open-source software giant Red Hat -- the biggest acquisition in IBM's 108-year history -- is the centerpiece of Big Blue's strategy to dominate in what it calls the "hybrid cloud," a computing model where companies do much of their business online but keep their most sensitive data in-house. Red Hat's revenue won't be included in IBM's results Wednesday because the closing happened after the second quarter, but management may discuss the financial impact and IBM's goals for the business. On Tuesday, IBM announced a multiyear alliance with AT&T Inc. that incorporates Red Hat technology. The companies didn't disclose financial terms, but IBM said it was worth billions of dollars.

-- CLOUD GROWTH: IBM sees the hybrid cloud as central to its return to top-line growth. The cloud businesses grew by 10% in the year before the start of the second quarter. IBM's long-term success as a cloud player, however, is still uncertain. It trails rivals Amazon.com Inc. and Microsoft Corp., which are both seeing far higher growth rates in their respective cloud operations. Investors want to see IBM accelerate its growth, but Chief Financial Officer James Kavanaugh in April said that the company's midteen percentage growth target would still allow it to gain market share in the hybrid-cloud market.

Write to Asa Fitch at asa.fitch@wsj.com

(END) Dow Jones Newswires

July 17, 2019 05:44 ET (09:44 GMT)

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