IBM Q4 Earnings Preview: 4 Key Metrics To Monitor

Societe Generale’s Richard Nguyen expects International Business Machines Corp. IBM to report in line results without any major surprises when it announces its Q4:16 numbers on January 19.

Nguyen maintains a Hold rating on the company, with a price target of $160.

Key Metrics

The analyst expects investors to focus on IBM’s return to revenue growth when the results are announced, and listed four key metric that should be monitored.

4 Key Metrics

1. Nguyen suggests a focus on the pace of improvement of the revenue growth trajectory, “which has steadily improved over the first nine months,” stating that IBM should be able to sustain a double-digit growth rate in its digital services, although that might not be sufficient to offset the decline in the company’s legacy business.
2. Nguyen also believes the momentum of the cognitive solutions and technology services segments should be monitored, following three successive quarters of constant currency growth. “Cognitive solutions’ growth is a key focus because the ongoing shift to cloud affects its profitability,” the analyst said.
3. The analyst also expects to focus on the “resilience of gross margin due to the transition to the as-a-service model and given the lower profitability of its acquisitions.” Nguyen expects gross margin expansion of 70 bps in Q4:16, driven by an improvement in top line growth, although gross margins for 2016 are expected to decline 120 bps.
4. Through the first nine months of 2016, the intellectual property segment has delivered revenue of $1.1 billion, an increase from the $489 million during the same period in 2015. However, the analyst believes that evidence of IBM’s target to drive this income stream in the future is still required.

“We maintain the view that IBM could reach the inflection point in its multi-year transformation in late 2017-early 2018, with growth in digital offsetting headwinds from its legacy business,” Nguyen added.