IBM's future is hard to read as it moves into cloud territory and earnings report is due

Big Blue’s transition further into software and cloud computing territory continues to make it difficult to forecast the computer giant's performance, according to an analyst who follows the sector. 

IBM releases third-quarter earnings on Wednesday as Wall Street eagerly waits to see if the legacy computer company’s recent acquisition of Red Hat boosts its cloud computing business. The $34 billion purchase of the major distributor of open-source software and technology closed at the start of the third quarter.

Wednesday’s earnings may not help IBM’s outlook as investors seek out some consistency in the results. Earnings per share are expected to drop to $2.67. Last year’s third-quarter EPS came in at $3.42, excluding certain items.

IBM had reported better-than-expected second quarter EPS of $3.17, excluding certain items, and $19.16 billion in revenues.

“This transition is causing a shifting of revenues that makes it nearly impossible to forecast performance due to conflicting trends,” said analyst Rob Enderle, financial analyst from the Enderle Group. He had recently visited the Poughkeepsie facility. 

Whether or not Red Hat can produce growth results this early on comes with a mixed bag of expectations. Some analysts expect to see signs of growth from the purchase, and others are looking elsewhere for short-term value.

“Near-term growth and stock performance will hinge on IBM’s ability to improve the fundamental performance of the legacy core – primarily [Global Technology Services],” wrote Stifel analysts led by David Grossman wrote in its 2020/2021 note on September 24. 

From mainframes to cloud

While the buzz might be centered on cloud computing and cognitive services, IBM has always been known for its mainframes, on which the company was built.

IBM’s Poughkeepsie facility is the home of IBM Z mainframe, including their news model, the z15, which has encryption, cloud native development and instant recovery capabilities. IBM also has plans to bring Red Hat OpenShift to IBM Z. Red Hat OpenShift platform helps with development and management of applications. 

Enderle sees strength in Big Blue’s mainframe effort since it fills a void in the server environment and is one of the last remaining mainframe vendors at scale. He did have some concerns about the staffing, but stated that the company is doing a good job retraining people who have been out of the tech workforce for sometime such as returning vets and women.

It is worthwhile to note that while IBM's System Segment has seen some growth this year, it's been offset by IBM Z product cycle dynamics as reported by CNBC. 

IBM also recently opened up a Quantum Computation Center at its Poughkeepsie facility, but it will be awhile before the company sees any results in this area.

Saba Ali: SAli1@poughkeepsiejournal.com; 845-451-4518