All eyes on IBM’s cloud, cognitive solutions ahead of earnings

When IBM (IBM) reported its fourth-quarter results in January this year, the company had topped both the revenue and earnings estimates. Even better, the tech giant had bucked a six-year trend of quarterly revenue declines. However, shares fell immediately after the announcement as investors remained skeptical of any future growth. Investors were disappointed by the lackluster gross and operating margins as well as the lower-than-expected outlook for 2018.

The company will be back with its quarterly results after the closing bell tomorrow, and the scenario is more or less the same. While earnings and revenue growth is on the cards, investors will be more hooked on how Big Blue performs in gross margins. IBM had reported a gross margin of 42.8% in the year-ago first quarter, and 48.2% in the previous sequential quarter.

Besides this, all the eyes will be on its services business, which ranges from cloud computing to artificial intelligence. Though at a much slower pace compared with its rivals, IBM has now completely shifted its dependency to newer technologies from its profit-stalling traditional ones. The company reported $36.5 billion in revenue from these services, which it termed as strategic imperatives, in 2017. During this period, this unit accounted for a little less than half of its total revenue.

As the company delves deeper into the latest technologies including artificial intelligence, quantum computing and blockchains, revenue from this unit is expected to grow to $40 billion in the first quarter. Revenue from cloud services jumped as much as 27% in the fourth quarter and is predicted to see further growth this quarter driven by an increasing client base. Cognitive solutions are providing a further boost to this unit, reporting about 4% growth in revenue to $4.22 billion in the fourth quarter, thanks to the success of Watson AI.

Revenue and net income

The street expects first-quarter adjusted net income to edge up 1% to $2.41 per share on revenue of $18.8 billion, which is expected to see a lower single-digit growth.

IBM was not a great performer last year, but it had a high Investors’ Day last month when it convinced investors that it is on a growth trajectory. In the conference call following the earnings announcement, investors would be looking forward to the impact of Chinese tariffs on the company’s performance as well as its action-plan to improve margins