IBM Earnings: What to Watch

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International Business Machines
Corp.

IBM 0.75%

is scheduled to announce first-quarter earnings after the market closes Tuesday. Here’s what to look for:

EARNINGS FORECAST: Analysts expect IBM to report earnings of $2.41 a share on an adjusted basis that typically omits acquisition- and retirement-related charges, according to a survey by Thomson Reuters. A year ago, IBM reported $2.38 a share in adjusted profit.

REVENUE FORECAST: Analysts expect total revenue of $18.83 billion for the quarter, up 3.7% from $18.16 billion a year earlier.

WHAT TO WATCH:

—CONTINUED GROWTH: Revenue in the fourth quarter grew 3.6% from a year earlier—ending a streak of nearly six years of quarterly declines—and Big Blue is poised to report growth continued into the following three months. Revenue could have grown as much as 5%, said UBS AG analyst

Steven Milunovich,

though favorable currency-exchange rates likely accounted for a good chunk of the increase.

—SERVICES TURNAROUND: Sales of updated industrial-strength computers introduced last year are expected to have made a critical contribution to revenue, several analysts said. Mainframe sales are cyclical, though, and are expected to wane by the end of the year. What might pick up the slack? IBM’s consulting and outsourcing businesses accounted for more than half of total revenue last year, but the services businesses declined by nearly 3% from the previous year. “If the services can turn around by the back half of the year, IBM will continue to grow,” said David Grossman, an analyst with

Stifel Financial
Corp.

—STABILIZING MARGINS: Pretax profit margins last year narrowed overall and across most IBM business units. Executives in the fourth-quarter conference call attributed the tightening to investments in strategic businesses such as cloud computing and artificial intelligence, saying margins would stabilize in the coming year. Bernstein Research analyst

Toni Sacconaghi

expects pretax margins declined again in the consulting and outsourcing divisions. Sales of highly profitable software such as transaction-processing programs and operating systems, which are spread among reporting segments but concentrate in Cognitive Solutions, could compensate somewhat, he said.

Write to Ted Greenwald at Ted.Greenwald@wsj.com



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