IBM Q4 Earnings Preview
Top Points:
IBM is scheduled to report fiscal fourth quarter earnings today after the close. There is a conference call scheduled for 4:30pm ET (the co typically guides in the press release). Capital IQ Consensus Estimate calls for Q4 non-GAAP EPS of $6.00 on revs of $28.3 bln. The co is expected to guide for FY14 EPS where consensus stands at $18.01. Co reaffirmed its objective to achieve at least $20 of operating EPS in 2015 ($19.97 FY2015 Capital IQ Consensus Estimate). On last quarter's earnings call, mgmt noted that hardware performance in China accounted for all five points of the constant currency decline in the growth markets and for 1.2 points of the 1.6 points of constant currency decline for all of IBM. Co has already taken mgmt action to improve performance. Mgmt had confidence that they could get this back on track; they expected a change in trajectory starting in Q4 and stated that it will be back to growth early in 2014. Mgmt also noted that the co has a strong pipeline in software and that they expect improvement in software rev growth and double-digit growth in profit in Q4. Last week, IBM announced plans to commit over $1.2 bln to significantly expand its global cloud footprint. The co plans to have data centers in all major geographies and financial centers with plans to expand in the Middle East and Africa in 2015. Earlier this month, the co confirmed that it will establish the IBM Watson Group, a new business unit dedicated to the development and commercialization of cloud-delivered cognitive innovations. The co will invest more than $1 bln into the Watson Group. On Oct 29, the co authorized $15 bln in additional funds for use in the co's stock repurchase program. This amount was in addition to ~ $5.6 bln remaining at the end of Sep 2013 from a prior authorization.
Key Points from Last Quarter:
Co reported Q3 earnings of $3.99 per share, excluding non-recurring items, $0.03 better than the Capital IQ Consensus Estimate of $3.96; revs fell 4.1% y/y to $23.72 bln vs the $24.8 bln consensus. The two services segments generated $14 bln in rev, declining 3% as reported but at constant currency return to growth of 1%. Pre-tax profit was up 17%, and pre-tax margin expanded by 3.3 points. Total backlog was $141 bln, up 2% at spot rates but up 6% at constant currency. Global Technology Services segment rev was $9.5 bln, down 4% or down 1% at constant currency. Global Business Services rev was $4.6 bln, flat as reported and up 5% at constant currency. · Looking at other segments, revs from the Software segment were $5.8 bln, up 1% or 2% at constant currency. Revs from the Systems and Technology segment totaled $3.2 bln for Q3, down 17%, down 16% adj. for currency, and growth markets performance drove two thirds of the rev decline, about half of which was China. · The Americas' Q3 revs were $10.3 bln, down 1% y/y (flat, adj. for currency); EMEA revs were up 1% to $7.3 bln (down 2% adj. for currency); Asia-Pacific rev were down 15% y/y (down 4% adj. for currency) to $5.5 bln. The co's total operating (non-GAAP) gross profit margin was 49.1% vs 48.1% in 3Q12, with increases in Global Technology Services, Global Business Services and Global Financing.
Analyst Comments:
Earlier this month, Stifel noted that 2013 was a difficult year for IBM and near-term fundamentals are likely to remain challenged, particularly in hardware and growth markets. Software should grow within the expected 3-4% range, though could remain lumpy, and services fundamentals should continue to improve as strategic initiatives reposition the business play out and economic fundamentals improve. Last week, IBM was upgraded to Buy from Outperform at Credit Agricole; tgt was raised to $225 from $215.
Options Activity:
Based on IBM options, the current implied volatility stands at ~ 23%, which is ~ 43% higher than historical volatility (over the past 30 days). Based on the IBM Weekly $187.50 straddle, the options market is currently pricing in a move of ~4% in either direction by weekly expiration (Friday). IBM puts are outpacing calls by a factor of 1.5:1 (~25.1K calls traded vs ~37.3K puts).
Technical Perspective:
Technically, this bluechip has been an under-performer with a loss of -20% off its March 2013 peak. Price also displayed relative weakness throughout the latter half of the year as it slid back to its 2-year lows near 175/172. Buyers defended the stock along those lows with decent rally into year-end, but right now in January the down-sloping 200-day moving average along 191 is acting as key resistance. In response to earnings, buyers need to prove that Oct/Dec "double bottom" along the 172/175 zone was legit and lift prices back over the 200-day ma towards the $200-level. Such action would break the multi-month downtrend in effect off the 2013 highs. Failure to do so could result in prices sliding back towards 180 and lower. Watch for initial support along the current Jan lows near the 182/183 zone.