International Business Machines Corp. (IBM) is scheduled to announce its second quarter 2011 results after the closing bell today. We have noticed estimates swaying on both the sides over the last few days, but considering the past trends we continue to believe another earnings beat is on the cards.
Prior Quarter Recap
IBM reported strong first quarter earnings and revenues that surpassed the Zacks Consensus Estimate. The solid result was primarily driven by robust revenue growth, continued margin expansion and share repurchases.
IBM’s key initiatives such as Business Analytics, Smarter Planet and Cloud offerings reported strong growth in the quarter. Business Analytics were up 20.0%, with 15% contribution to software, and contributing more than 30% in Global Business Services. Smarter Planet increased 20.0%, while Cloud offerings achieved a growth of 5.0% in the quarter.
From a geographic perspective, first quarter 2011 revenues were up 9.0% (8.0% in constant currency) in the Americas and grew 12.0% (4.0% in constant currency) in the Asia-Pacific region. Europe, Middle East & Africa (EMEA) revenues were up 3.0% (2.0% in constant currency) in the quarter.
For further details please read: IBM Beats, Raises Guidance
Current Quarter Expectations
For the current quarter, the Zacks Consensus Estimate for IBM’s earnings is pegged at $3.01, a 24.9% upside from the previous quarter. Total revenue as per the Zacks Consensus Estimate is $25.4 billion, which equals to a 3.3% upside from the revenues earned in the prior quarter.
We note that IBM has consistently exceeded estimates in the previous four quarters. The average surprise in the preceding four quarters is a positive 1.76% and another positive earnings surprise is expected from the company.
Based on the strong first quarter 2011 results, IBM raised its fiscal 2011 operating EPS estimate to at least $13.15 from its previous guidance of at least $13.00. GAAP EPS guidance increased to at least $12.73 from at least $12.56 for the same period.
Currently, the Zacks Consensus Estimate for fiscal 2011 is pegged at $13.23 per share.
Estimate Revision Trend
For the current quarter, out of the 21 analysts covering the stock, two upward and subsequently two downward revisions were made, leaving the Zacks Consensus Estimate at $3.01 per share.
For fiscal 2011, no revisions in either direction were noticed from the 22 analysts covering the stock. The Zacks Consensus Estimate for fiscal 2011 is pegged at $13.23 per share.
The analysts remain encouraged by IBM’s focus on more profitable businesses, such as software and services. The analysts believe that IBM’s product pipeline for both Software and Services remains healthy and expect hardware to benefit from the recent refresh of z Series, Power 7 and WebSphere across its entire portfolio in 2011.
Additionally, IBM has expanded its cloud and analytics portfolio that will incrementally benefit the company in the long run. Moreover, solid backlog growth, incremental cost cutting and share buybacks will support improving revenues and EPS trends through 2011.
Conclusion
We believe IBM’s growing initiatives in the smarter planet, business analytics and optimization will drive long-term growth. Besides, the ability to generate strong free cash flow, expand margins and improve the already robust balance sheet make the stock attractive over the long term.
IBM remains a heavyweight in the cloud computing market and its strong cash balance enables IBM to acquire companies with high intellectual property (IP), which will drive further growth in the upcoming quarters. We have a long-term Neutral recommendation on IBM and are optimistic about its strong fundamentals and robust growth prospects going forward.
The cloud computing market is expected to grow at a CAGR of 40.0% from 2010 to 2015, crossing $7.0 billion in revenues by 2015. Cloud computing leads to improved services and elevated security requirements for companies that use it and IBM’s product portfolio is well positioned to benefit.
IBM is experiencing strong revenue growth across all geographical regions, coupled with robust growth in emerging markets worldwide. IBM expects these growing markets to drive revenues and increase growth in 2011 and beyond.
However, the competitive landscape includes technology giants, such as Oracle Corp. (ORCL), Hewlett-Packard Co. (HPQ), Microsoft Corp. (MSFT) and EMC Corp. (EMC).
We currently have a Zacks #3 Rank for IBM, which translates into a short-term Hold rating.
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