Previewing IBM's Q2 Earnings: Key Questions Remain For 2H'17

International Business Machines Corp. IBM will report its second-quarter earnings on July 18 after the close, but analysts are not expecting anything spectacular for investors.

Bernstein analyst Toni Sacconaghi previewed the report, and reiterated a Market-Perform rating and $150 price target. Shares closed on Thursday at $153.63.

The analyst expects IBM to meet or exceed the $2.75 consensus EPS estimate, but doubt revenues will beat the Street’s estimated $19.47 billion.

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Pushing Into The Second Half

Management had guided “well below” consensus EPS for Q2 and Sacconaghi expects EPS guidance of “at least” $13.80 for the year to remain unchanged.

“That said, we think IBM's EPS guidance for full year 2017 is aggressive,” said Sacconaghi in a note. It implies a significantly heavier second half, by a proportion greater than any time in the last 20 years.

The analyst doubts contributions from the mainframe cycle can overcome the implied ramping, and would require a boost from a tax event or one-time gain.

For Q3, Sacconaghi estimates $3.25 EPS compared to the Street’s $3.38 and would not be surprised if IBM follows suit.

Investor Advice

“Should [investors] begin to build positions now?” said Sacconaghi. “Our simple answer: No.”

Those already with a stake in the company though, should look out for five key metrics during the earnings call:

1. Total revenue growth on an organic and constant currency basis. The analyst expects to see a negative 1.5 percent change.
2. Software business growth on the same standards. Sacconaghi forecasts negative 2.4 percent.
3. Strategic imperatives growth, around 9.5 percent according to Sacconaghi.
4. Gross and PTI margins, considering Q1’s declines.
5. Services signings, which the analyst expects to be $13 billion or more.

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