As International Business Machines (NYSE:IBM) prepares to lead off another edition of tech earnings after trading closes Oct. 16, traders will be looking to the top line of revenue more closely than the bottom line of earnings.
IBM stock has been stuck in neutral because revenues have been stuck in neutral, or reverse, for years now. If you bought shares five years ago, they’re worth 20% less. It’s true you have had a steady stream of dividends to keep you warm, currently $1.57 per share yielding 4.46%, but IBM long ago stopped being a tech stock and became an industrial, more a Ford Motor (NYSE:F) than a Microsoft (NASDAQ:MSFT).
The reason is simple. IBM still gets a huge chunk of its revenue, and profit, from its mainframes, now called the Z Series. The mainframe monopoly is a cash cow that’s slowly drying up.
To the Cloud
IBM’s press shop does an excellent job of hiding its problems in its press releases, the text emphasizing profit margins and as-a-service run rates. You must be quick to spot the key number, off in a corner, which in the last quarter was 2%. That’s the year-over-year revenue growth adjusted for common currency.
For the quarter ending in September, analysts are expecting $19.12 billion in revenue and $3.40 per share of earnings, but they’re hinting at $3.43. Even this is something of a dodge. Revenue for the second quarter was $20 billion, $19 billion is less. (The expected revenue number is even slightly below last year’s figure.)
Over the last year, IBM has been getting a boost from its latest mainframes, but that boost is slowly fading. Watson, the artificial intelligence front-end featured on many of its ads, should be picking up the slack by now, but it’s not. It’s losing share to Microsoft and Amazon (NASDAQ:AMZN).
Watson is part of IBM’s “cognitive solutions” group, which also includes such things as high-profit transactions processing software. IBM also likes to talk about “strategic imperatives” revenue, lumping cloud with hardware and services, and say that’s up 15% year-over-year, 12% in constant currency. But the numbers are broken down as cognitive solutions, global business services, technology services and cloud platforms, and systems. It’s deliberately hard to calculate and argue with.
An Outsourcing Company
IBM hasn’t broken down employment by country since 2010, but The New York Times reported last year more of them are in India than in the U.S., about 130,000 out of 366,000 according to Statista. IBM’s continuing to lay off people this year, mostly in sales, but messages at The Layoff still complain of there being too many managers, not enough workers.
This is the way IBM has been for a century. Clients were gently guided to complex systems by well-dressed salesmen, the work then organized and distributed through layers of bureaucracy. This is a 19th century organizational structure. It doesn’t work in the 21st century. Moving that labor and bureaucracy to lower-wage states only get IBM so far.
Small wonder the company has no growth.
The Bottom Line on IBM Earnings
On the one hand, IBM is a solid dividend stock, and if it misses on revenue and the price of IBM stock falls, that might be a good opportunity for income-oriented investors to grab it. On the other hand, if IBM stock rebounds after earnings, and technical analysts are expecting an 8% bounce, I would avoid it. Options traders may be waiting anxiously for the revenue number, but investors are better off looking to the Kansas City Chiefs for excitement, and should only consider IBM if the yield rises because that’s the only thing worth buying.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT, AMZN and F.