IBM Earnings: Margin Expansion and a Stable Guide Signal IBM Is Faring Well; Shares Fairly Valued
IBM’s IBM first quarter came short of our expectations on the top line while exceeding our earnings forecasts, thanks to margin strength. While consulting revenue has weakened due to its discretionary nature, we found it comforting that IBM is not seeing weakness in software, as we believe software is the stickiest of IBM’s offering, which contributes to the firm’s narrow moat. This assurance is reflected in management’s roughly maintained guidance for the year. As a result, we are reiterating our fair value estimate of $126 per share, which leaves shares fairly valued, in our view. As a reminder, since December 2022, IBM’s stock price has consistently fallen, approaching our fair value estimate. We believe the market is now properly factoring in IBM’s vulnerabilities amid tougher competition in a quite different IT services landscape compared with the once closed systems landscape it used to benefit from.
In the first quarter, total revenue increased by 4% year over year in constant currency to $14.3 billion—slightly shy of our previous outlook. IBM’s overall GAAP operating margin for the quarter was 10%, up from 7% in the prior-year period thanks to gross margin expansion. This was aided by price increases in IBM’s more differentiated software as well as efficiency and productivity initiatives, which are expected to reach $2 billion in annual run-rate savings by the close of 2024. Altogether, IBM posted GAAP earnings per share of $1.02 for the quarter, compared with our in-house estimate of $0.75.
IBM’s fiscal 2023 guidance remains relatively unchanged. IBM expects to achieve constant-currency revenue growth of between 3% and 5%, and continues to see a neutral currency impact, implying a benefit in the second half of the year. That being said, we expect consulting revenue to decelerate as it is overall considered more discretionary spending than the rest of IBM’s portfolio.
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