This "look-ahead" post discusses how I came up with an estimate for IBM's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.
Once the company’s official results become available on January 21, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative. Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.
But, let's take a step back and start with background information about IBM.
IBM was the first giant computer company, and it was once one of the largest companies in the world. When selling computing hardware became less profitable, IBM leverage its ties to the corporate world and increased its focus on information technology services for businesses. Always a research powerhouse, the company subsequently developed cloud-computing and artificial intelligence services (e.g., "Deep Blue"), but, despite seeming advantages, IBM's annual revenue has been declining slowly for years. IBM started to reinvent itself more dramatically in 2019 when it acquired Red Hat, a leading open-source software firm, for $34 billion. The next step came in October 2020 when IBM announced it would spin off its managed infrastructure services unit into a separate, publicly traded company. This business is currently part of the Global Technology Services division, and it brings in revenue of about $19 billion per year.
With a market value of about $110 billion on a fully diluted basis, IBM is part of the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000
IBM recorded profits of $8 billion on revenue of $75 billion during the four quarters that ended in September. Revenue in the September quarter totaled $17.6 billion, 3% less than last year's $18.0 billion. The Global Technology Services business was responsible for 37% of overall revenue, and this unit's revenue fell by 3.6% compared to the year-earlier result. The Cloud & Cognitive Software business contributed 32% of revenue, and this unit's revenue grew by 6.8%. The Global Business Services unit supplied 23% of revenue, and the amount fell by 4.7%. See https://tinyurl.com/y34rev9g for IBM's most recent quarterly report.
My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts. It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling. I also look for other information about the company in the news, and I take advantage of trends in the company's historical results. While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP). Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.
IBM's management did not, as mentioned above, communicate expectations, or "guidance," for the December 2020 quarter with their third-quarter report; however, they had previously signaled that the fourth quarter would include a hefty $2.3 billion ($2.36 per share) restructuring charge. This charge has to be included in the baseline for the results that comply with U.S. Generally Accepted Accounting Principles (GAAP), which are the kind I follow.
Another more positive factor that has to be considered when setting expectations is that the fourth quarter is typically the best one of the year for IBM.
The following baseline Income Statement takes into account what I know about IBM and its historical results, but I have less confidence in the figures than I normally might. The extent to which the company can compete effectively against large cloud service providers is still to be determined, and COVID-19 only makes the outlook even murkier. The earnings estimate is a loss of $88 million, minus $0.10 per share.
Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats. The standardization facilitates cross-company comparisons.
#ibm #lookahead #gauges #gcfr #gcfr2 #nac_financialanalysis
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