IBM (NYSE:IBM) is scheduled to announce second-quarter earnings on Monday, July 19. It's a company in transition on many levels, so the earnings report will likely hinge on factors besides the financials.
When the tech giant releases its results, investors should pay close attention to what management has to say about the following three issues:
1. Revenue numbers have mixed history
IBM offered hope in 2021 after years of annual revenue declines when it reported a 1% increase in the first quarter compared with year-ago levels. The result gave investors some cause for optimism, but it also remains a point of frustration.
The company runs several legacy businesses, many of which have struggled to increase revenue. Two of IBM's five segments posted year-over-year revenue declines in the previous quarter. Admittedly, the 21% quarterly growth in overall cloud revenue during the last year may have heartened some investors. Nonetheless, the overall revenue number could discourage some who would otherwise buy the stock.
The company did not offer revenue guidance for the upcoming quarter, but it expects to grow revenue for the fiscal year. IBM also said full-year free cash flow would come in between $11 billion and $12 billion, which would be an increase from the $10.8 billion reported in 2020.
Analysts offered more specifics, forecasting consensus revenue of $18.3 billion for the second quarter. This would mean a 3% increase from year-ago levels, increasing the likelihood the quarter will bring sequential improvement.
2. The impact of Jim Whitehurst's resignation
In addition to revenue, the July 2 resignation of former Red Hat CEO and current IBM president Jim Whitehurst could lead to uncertainty. The stock price plunged following this announcement, and the lack of clarity on who will replace Whitehurst adds to the unpredictability.
Nonetheless, the move likely has more to do with Whitehurst than IBM. He previously served as chief operating officer of Delta Air Lines, and he told Barron's he "wants the chance to run something." He joined Red Hat as its CEO in late 2007 and took the president role not long after Red Hat was bought by IBM in July 2019. CEO Arvind Krishna has held his position at IBM for just over a year. With the company wading deeper into the hybrid cloud under his leadership, Whitehurst would likely not find such a position at IBM anytime soon.
However, with 17% quarterly revenue growth over the last year, Red Hat has served as one of the better-performing divisions. For this reason, what Krishna says (or does not say) concerning Red Hat's future could become pivotal.
3. Further details about the Kyndryl spinoff
Lastly, the upcoming spinoff of Kyndryl -- a managed infrastructure services provider (MSP) business -- could offer a tremendous opportunity to both Kyndryl and IBM, but the move also leaves a lot of questions unanswered.
With the spinoff occurring by the end of the year, long-term investors have to look at these entities as two separate tech stocks. This does not necessarily bode poorly for investors in either company. However, as of now, stockholders have little visibility of either as a separate company. This is crucial, as stockholders will need the information to decide whether to keep both companies or focus exclusively on IBM or Kyndryl.
For one, cloud-oriented investors might have little interest in owning Kyndryl. Indeed, the spinoff focuses the remainder of IBM more heavily on the cloud and supercomputing, and separate financials would probably further highlight the faster cloud growth.
Conversely, value investors will probably want to know more about the case for Kyndryl stock. It has declined under the IBM umbrella, but with a backlog exceeding $60 billion, Kyndryl could drive investor returns by reviving itself under new management.
Another question involves the dividend. Krishna has told investors that the two companies will initially sustain the current payout level between the two of them. Also, assuming both IBM and Kyndryl continue annual increases, both companies will maintain their Dividend Aristocrat statuses.
However, IBM's stockholders earn $6.56 per share annually in payouts. This amounts to a yield of 4.7% at current prices. Depending on how IBM splits the dividend, income-oriented stockholders might favor one company above the other.
Investors seem to have more reasons to pay close attention to IBM's upcoming earnings report. While a focus on revenue is not unusual, investors will probably want more clarity on the direction of Red Hat and the futures of IBM and Kyndryl as separate entities.
Admittedly, these issues will resolve themselves in time. But the sooner investors can address uncertainties, the more it clarifies the case for IBM, and ultimately for Kyndryl's stock as well.