Strategic Imperatives Are In Focus Ahead Of IBM Q1 2016 Earnings

  • IBM will report its Q1 2016 earnings results next week (April 18).
  • The main focus will be strategic imperatives progress, Watson, and server chip businesses.
  • Consensus reflects a YoY drop of 7% in top line and 28% in EPS.

The tech behemoth International Business Machines Corp. (NYSE:IBM) will report its Q1 2016 earnings results next week on Monday after the markets close. The company has gone through a rough patch in the last few years as it has struggled to adjust its business to the drastic changes in the different tech sectors, which is reflected in the sharp 24% drop in annual revenues between 2011 and 2015. In the last quarter of 2015, IBM reported exciting progress in changing the focus of the company, and it generated $29B, which is 35% of the total revenues from what the company considers as strategic imperatives like analytics, cloud, mobile, security, and social.

According to IBM’s previous earnings release presentation, the portion of strategic imperatives of the total revenues has rapidly risen in the last three years from 22% in 2013 to 35% in 2015. In Q1 2016, the company further invested in its strategic imperatives as described above and it acquired an extensive list of companies to boost its offering in the various strategic focus areas. IBM’s acquisition spree included: IRIS Analytics, a payment fraud analytics company; Upstream, a cloud-based video service; the Weather company’s product and technology businesses; Resource Ammirati, a digital marketing and creative agency; Bluewolf, a global strategic Salesforce consulting partner; Optevia, a CRM SaaS solutions provider; and, a full-service digital marketing company.

On top of the multiple acquisitions closed the company also entered into many strategic partnerships with leading companies that include Ford Motor (NYSE:F), Under Armour (NYSE:UA), Check Point Software (NASDAQ:CHKP), Siemens Aktiengesellschaft (OTC:SIEGY), Deloitte, Softbank (OTC:SFTBY), etc. As shown in the chart below, IBM’s stock reacted to the continuous decline in revenues and net income and dropped sharply compared to the S&P500 in the last five years. The beaten-down stock has slightly moved up since the beginning of the year, in correlation with the S&P 500 move; however, it is still not a sign of a bottom or a turnaround.

IBM_Chart 3_041416


Source: International Business Machines Corp. stock price chart by

The most significant partnership was announced at the beginning of April that IBM will co-develop a POWER-architecture based server chip with Alphabet Inc-C (NASDAQ:GOOG) and Rackspace Hosting (NYSE:RAX) to be included in these companies’ data centers starting 2017. As both Google and Rackspace used Intel (NASDAQ:INTC) servers, this initiative is expected to replace some of the Intel-backed servers in their data centers.  Facebook (NASDAQ:FB) was also named as a potential client of IBM’s POWER9 server chips. These impressive design wins have a significant potential to expand to additional internet giants that are heavy users of data centers and large buyers of data center equipment.

Another strategic growth driver is IBM’s Watson project which is a powerful data discovery and Q&A BI tool that analyzes unstructured data from multiple resources and provides solutions for complex queries. IBM constantly invests in Watson and expands its ecosystem to serve the analytical needs of the leading companies worldwide. IBM Watson will drive not only income from selling software licenses but also revenue from selling appropriate server solutions that could run Watson and efficiently use it.

The IBM Watson initiative and Google/Rackspace design win join a long list of strategic efforts that IBM made to shift the main focus area of the company as presented at the top of the article. All of these strategic growth drivers will be monetized slowly in the long-term and gradually lead to a turn around in the company’s financials. The focus of the upcoming earnings release will be on how much revenue IBM generates from its strategic imperatives and how it progresses in expanding the Watson and server business. Investors with a very long-term investment horizon should keep tracking IBM as it might become even more attractive after an additional sell-off.

These are the comparable figures to watch in IBM Q1 2016 earnings:

Q1 2015 Actual Q1 2016 Consensus
Revenue $19.59B $18.25B
EPS 2.91 2.08

Source: Dow Jones

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