IBM Poised for Another Sales Slide Despite Red Hat Deal: What to Watch

By Asa Fitch

International Business Machines Corp. is expected to report third-quarter earnings after the market closes Wednesday. The results, which follow a string of quarterly revenue declines, will be the company's first since it closed its $34 billion purchase of open-source software giant Red Hat. Here's what to look for:

EARNINGS FORECAST: IBM is expected to report adjusted earnings per share of $2.67, down from $3.42 a share a year earlier, according to analysts surveyed by FactSet. Net income should be about $2.41 billion, around 10% lower than a year earlier, according to analysts' expectations.

REVENUE FORECAST: IBM is set to report sales of $18.22 billion, according to analysts' expectations, down 2.8% from a year earlier. That would be the company's fifth straight quarterly revenue decline.

WHAT TO WATCH:

RED HAT EFFECT: IBM completed its biggest-ever acquisition in July, snapping up Red Hat--a Raleigh, N.C.-based company best known for its custom version of the open-source operating system Linux--in a bid to revive its fortunes. With the deal now closed, investors are looking for early indications of how the combination is progressing, even if the near-term impact of deal-related revenue deferrals and stock adjustments will be a drag on IBM's profit. In August, IBM cut its earnings per share outlook for the full year to $12.80 or more from an earlier projection of at least $13.90.

CLOUD GROWTH: IBM's pitch to investors has long centered on its embrace of cloud computing, a model where companies rent out computing power instead of using their own machines. Investors want to know how that strategy is playing out after the company said annual cloud revenue rose 5% in the second quarter. That is much slower growth than Amazon.com Inc., which dominates the cloud market, and Microsoft Corp. IBM also hasn't reached its own aspirations for midteen-percentage-growth rates that Chief Financial Officer James Kavanaugh discussed in April.

MAINFRAME REFRESH: The steam is running out on sales of IBM's latest generation of mainframe computers. In the second quarter, revenue in the division that includes mainframes fell nearly 20% from a year earlier as the computers it introduced in 2017 lost some of their early sales momentum. The spotlight now is on how much further mainframe revenues might fall, as well as the rollout of IBM's next generation of mainframes, which the company introduced in September. It has yet to begin selling them.

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

(END) Dow Jones Newswires

October 16, 2019 05:44 ET (09:44 GMT)

International Business M... (NYSE:IBM)
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