Summary
- IBM reports earnings Wednesday.
- Most of the conversation will be about Red Hat.
- Red Hat could allow IBM to make deep cuts into R&D and SG&A.
- I rate IBM a hold.
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Source: Forbes
IBM (IBM) reports quarterly earnings Wednesday. Analysts expect revenue of $19.16 billion and EPS of $3.07. The revenue estimate implies a 4% decline Y/Y. Investors should focus on the following key items:
IBM's Top Line Could Remain Stagnant Even After The Red Hat Deal
IBM has been transitioning from mainframe computing to cloud computing. Its top line has eroded for several quarters as the company has attempted to find its footing. Its recent $34 billion acquisition of Red Hat is expected to ramp up IBM's cloud computing strength. I would consider Q2 a reset quarter for IBM since it will not include results from Red Hat. Results for the second half of 2019 will better reflect the company's full operating potential.
The revenue impact from Red Hat will be negligible; Red Hat's revenue for its most recent quarter was $934 million, up 15% Y/Y. It would represent about 5% of IBM's proforma revenue of $19.1 billion. Its addition may not stop the slide in IBM's total revenue. IBM's proforma revenue (IBM Q1 2019 revenue and Red Hat's revenue for quarter-ended May 2019) declined 4% Y/Y.
Strong consulting revenue was not enough to keep Cloud and Cognitive Software from falling 2% Y/Y. Revenue growth from Global Business Services ("GBS") was flat while Global Technology Services ("GTS") fell 7%. GTS did not generate growth in hybrid cloud revenue, but the addition of Red Hat should help going forward. Red Hat's open-source software provides an alternative to proprietary software. Its hybrid cloud offerings could potentially (1) be more cost effective to scale than private cloud and (2) offer more data security than the public cloud. Red Hat will likely make IBM one of the top players in hybrid cloud computing.
