IBM Looks To Avoid Return to Revenue Declines in Today’s Earnings

Legacy tech company IBM reports third-quarter earnings after the closing bell on Tuesday, October 16. Here’s a look at what might be expected from Big Blue’s report.

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IBM (IBM), aka Big Blue, is one of the first bigger tech companies to report earnings, scheduled for after market close on Tuesday, October 16. 

For Q3, IBM is expected to report adjusted EPS of $3.40, up from $3.26 in the prior-year quarter, on revenue of $19.1 billion, according to third-party consensus analyst estimates. Revenue is projected to come in slightly below last year’s $19.15 billion. Management said it expects a stronger U.S. dollar to be a 1% to 2% headwind for revenue, whereas it had been a tailwind for the company in the first half of the year.  

IBM broke its 22-quarter streak of declining revenues with 4% year-over-year growth in Q4 2017. However, after a few quarters analysts aren’t expecting that growth to be maintained in this report. Over the longer run, analysts are widely expecting IBM to deliver year-over-year revenue growth between 1% and 3% through 2021, while some are expecting no growth or slight declines. 

Many of those analyst estimates are predicated on continued growth in what IBM management calls its Strategic Imperatives, which encompasses cloud computing, data analytics, mobile technologies and security.

In Q2 2018, IBM reported that strategic imperatives revenue grew 15% year over year to $10.1 billion—the cloud segment, which is included in strategic imperatives, increased 20% year over year to $4.7 billion. An area that some analysts have expressed concerns about is Cognitive Solutions, which includes Watson-based services. In Q2 2018, revenue in this division came in flat at $4.6 billion, when analyst consensus was for $4.78 billion. 

For Q3, analysts seem to be conservative and, on average, are expecting Cognitive Solutions revenue to decline 2% year over year to $4.3 billion. 

Beyond Strategic Imperatives, IBM’s Systems segment is likely to remain a focus among analysts, as this division grew 25% year over year to $2.2 billion in Q2 2018, largely a result of the company’s Z mainframes. The z14 mainframe was launched a little over the year ago, so analysts are expecting tougher comparisons in the Systems segment for Q3. 

Down on the Year. IBM has been trending downward since peaking at $171.13 at the end of January. Since mid-April, the stock has been trading in a tighter range between the high-$130s and $155. The stock pulled back along with the broader market over the past week and is trading not too far from its 52-week low of $137.45. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

IBM Options Trading Activity

After hitting a multi-year high of $182.79 in early 2017, IBM has trended downward since then. Going back to mid-April, the stock has been trading in a tighter range between the high-$130s and $155. Heading into tomorrow’s report, it is towards the lower end of that range and closed at $141.13 during yesterday’s session.  

Options traders have priced in about a 4.5% stock price move in either direction around IBM’s earnings release on Tuesday, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 86th percentile as of this morning. 

In short-term options trading at the Oct. 19 monthly expiration, calls have been active at the 145 and 150 strike prices. On the put side, there has been a smattering of activity starting at the 141 strike and going down to the 133 strike. Open interest is highest at the 145 strike, with open interest around 25,000 contracts for both calls and puts. 

Further out at the Nov. 16 monthly expiration, recent volume has been heavier on the call side and concentrated at the 145, 150 and 155 strike prices. There hasn’t been a whole lot of put activity recently at this expiration. The 135- and 140-strike puts have seen a little bit of activity, but not much compared to calls. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Good Trading,

JJ

@TDAJJKinahan

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