The famed Big Blue might very well have investors feeling a little blue after second quarter results are reported by IBM (IBM, +0.88%) after the bell today.
Analysts’ forecasts are for revenue to decline further, following what has become an established trend while earnings per share are also expected to be down from a year ago.
The Wall Street Journal reports that analysts forecast that IBM revenue has dropped steadily for the last 13 quarters while growth in revenue is only expected to resume in the third quarter of 2016. The main factors affecting revenue have been the loss in sales as less active divisions have been sold off, while during the recent past, IBM has also been a victim of the strong U.S. dollar (USD) with most of its revenue is derived offshore.
Revenue for the quarter is expected to drop to $20.9 billion, a decline of 14%, while the software component of total revenue is expected to decline by 9.4% to $5.88 billion according to a FactSet analysis. This compares to the estimated loss of 9% as a result of the currency strength.
IBM is also expected to report adjusted earnings of $3.79 per share excluding recurring items. This is a drop from the $4.32 Q2 EPS reported a year ago. With the exception of the third quarter of 2014, the company has beaten the consensus EPS forecast for each quarter during the past year.
Historically, IBM has experienced difficulties in the past related to changing consumer needs as technology has developed from desktops to smaller and more efficient computing devices. The near disaster of the 1990’s, when a record loss of $10.8 billion was reported for the 1992 financial year, resulted in a major strategy change with a concentration on services first and products second which resulted in a revival of company fortunes.
The current move to what IBM describes as “strategic imperatives” of cloud computing, mobile, social cyber security and analytics software, accounted for $25 billion out of the $93 billion revenue reported for the last financial year. These divisions reported an increase of 20% in revenue during that year. Revenue from these sources will be closely watched in the Q2 report later today.
Meanwhile, Wells Fargo analyst Maynard Um wrote in a note to clients that “performance of the software segment is key to meeting targets.” He believes that the free cash flow figure should be an important one to watch, if IBM is to reaffirm its full-year adjusted EPS forecast, which he expects it to do. The first quarter which was reported projected the free cash flow figure to be flat for 2015.
Also, Brian White, an analyst at Cantor Fitzgerald is one of two analysts taking a cautiously optimistic view with a buy rating saying he expects less “drama” than in previous results over the recent past.
White wrote in a research note, “We view 2015 as another transition year for IBM, and similar to the past few quarters, we expect the message of change through strategic imperatives to be voiced next week [today’s report]. Despite ongoing choppiness that we expect during this transition, we believe the stock holds characteristics that dovetail well with the mindset of value and contrarian investors alike.”
MT4 Chart: IBM