IBM earnings preview: the Cloud might rain profits

IBM (IBM) is predicted to report its earnings after the market close on Wednesday. Most of the analysts are looking for the tech veteran to post upbeat earnings and revenue for the second quarter. Cloud computing has been the upcoming stream of business for IBM and investors are looking forward to seeing the segment outperforming.

In the last quarter, IBM posted a 1.20% earnings surprise despite a 4.4% drop in the bottom-line. Strong cloud revenue drove the top line. After six years of a dip in revenue, the company posted revenue growth for two successive quarters helped by currency tailwind. Investors will be looking for the company to carry on the positivity in this quarter and the increase will be related to exchange rates change.

Looking ahead into the full-year 2018, the diversified tech giant reaffirmed its adjusted operating income outlook of $13.80 per share and adjusted earnings estimate of $11.58 per share. The company still sees free cash flow of about $12 billion for fiscal 2018.

On the whole, cloud computing, which is lauded as the latest revolution, is expected to achieve $163 billion in annual revenues by 2022. Robust growth from cloud computing is expected in the current year and beyond for all the providers who spend on cloud service adoption that matched last year’s record highs. Also, costs will decline in the next couple of years due to rising competition.

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IBM has been facing stiff competition from its rivals Microsoft’s (MSFT) Azure and Amazon (AMZN) in the cloud computing segment for the most-recent first-quarter. Azure’s cloud revenue climbed 58% for the first quarter, and cloud revenue of Amazon Web Service jumped 48%. On the other hand, IBM Cloud posted just 20% rise in revenue due to seasonal factors.

In addition, cloud computing, analytics, and artificial intelligence remained the main growth areas for IBM that replacing its legacy businesses. Margins have taken the beating in the past. Market analysts have considered the 4 percentage points decline in gross margin in 2017 and the 5 percentage points decrease in operating margin as a sign of negativity in the carryover of the top-line to the bottom-line growth.

Among IBM’s rivals in the software business, Oracle (ORCL) reported adjusted earnings of $0.99 per share in the fourth quarter, up 11% compared to the prior-year quarter. The future of Oracle remained strong and steady with revenue growth forecast aiding the company to deliver double-digit non-GAAP EPS growth for fiscal 2019.

Microsoft (MSFT) is scheduled to report its fourth-quarter earnings on July 19. Market analysts are expecting Microsoft to report upbeat earnings for the quarter on an 18.30% revenue growth estimate.