IBM pops as Q1 earnings top estimates; Analysts cautiously positive

Investing.com -- IBM reported Wednesday fourth-quarter earnings that beat analysts’ forecasts, driven by an uptick in margins amid demand in its software business and cost cuts.

International Business Machines (NYSE: IBM) was about 2% higher in pre-market Thursday trade following the report.

IBM reported earnings per share of $1.36 on revenue of $14.3 billion. Analysts polled by Investing.com anticipated EPS of $1.27 on revenue of $14.37B.

The company's software business, which includes transaction processing and hybrid platform&solutions, reported revenues of $5.9B, up 2.6%.

Hybrid platform&solutions drove the bulk of growth following an 11% jump in Red Hat.

Consulting, and financing revenue rose 2.8% and 27.3% respectively, while Infrastructure revenue slipped 3.7% in Q1 year-on-year.

Gross margin climbed to 52.7% from 51.7% in the same period a year earlier, boosting cash flow. Free cash flow climbed $0.1B to $1.3B.

"[W]e again expanded our gross profit margin, improved our underlying profit performance and increased our cash generation," the company said.

For fiscal 2023, the company guided revenue growth of three-to-five percent, with full-year free cash flow expected to be about $10.5B, up $1B from the prior year.

BMO analyst Keith Bachman cut the price target on IBM stock to $145 per share from the prior $155.

"Consulting signings were solid though we think IBM appropriately lowered Consulting guidance for the year. We believe pricing is a help for Software growth this year, especially in TPP, though we think the durability of pricing help in TPP remains a question. Overall, while results were about in line with our expectations, we have too many lingering questions to be constructive at this juncture."

Morgan Stanley analyst Eric Woodring also slashed the price and remains cautious on rich valuation.

"[The] report is unlikely to sway bears or bulls, as it was a cleaner than expected quarter, but not without blemishes, and we are closely watching for signs of how large enterprise behavior shifts - if at all - as we move deeper into 2Q. At ~15x our new FCF forecast (and ~14x our CY23 EPS), we don't find valuation to be overly compelling in light of the revenue growth deceleration and therefore remain on the sidelines at EW," Woodring said.

By Yasin Ebrahim and Senad Karaahmetovic

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