Kyndryl's earnings report has the potential to be messy as Big Blue spins off managed infrastructure-service business.
IBM is scheduled to report earnings after the third quarter of a week. IBM laid out plans earlier this month for the expected spinoff of Kyndryl, first announced a year ago, along with discussing how its earnings reports will change after the spinoff is complete.
With the spinout of Arvind Krishna and the acquisition by Red Hat, you re seeing that just under half our portfolio is software, and a little under one-third of it is consulting, said IBM Chief Executive Kyndryl in his presentation. These are both healthy drivers of growth with Red Hat growing at a very healthy rate within that, and it is the perfect way to start a redhat today? IBM closed its $34 billion acquisition of Red Hat in July 2019 after first announcing it three years ago.
This allows us to create a platform-centric model, Krishna said. Infrastructure remains an important part of our foundation. This portfolio, together with the investments we are making, both organically and acquisitionally, and our growing ecosystem will deliver Mid-single digit revenue growth starting in 2022. IBM came off a streak of four quarters of declining revenue with a 3.4% gain and a 1.3% increase for the second quarter in the first quarter to be implemented.
The remaining company — which has been described as NewCo – would be split up into simplified business unit: consulting, software including Red Hat and cloud and infrastructure.
Under the new scheme, Consulting will replace Global Business Services, Software will replace Cloud and Cognitive software and Infrastructure will replace Systems with those parts of Global Technology Services which aren t included with the Kyndryl spinoff. Kyndryl was classified as continuing operations and the remaining company's reporting would focus on discontinued operations. Morgan Stanley analyst Katy Huberty, who has a neutral rating and a target price of $164, said the spinoff has given her in-line expectations for the report given the changes IBM outlined
Ahead of the separation, IBM has to go back to customers and split exisiting long-term contracts into two separate core IBM and Kyndryl contracts, Huberty said. Most of this disruption was expected to take place in the months leading up to the spin planned for 3 November 2021 and could lead to customers 1 pausing new net spend until contract negotiations are compete, and or 2 taking the opportunity to re-negotiate pricing and/or cancel deals with IBM. However, we re not calling for a material miss, but the disruption from contract separation renegotiations could be a contributing factor to slower than expected revenue growth and that Sep Quarter Results could be messy, Huberty said.
Of the 16 analysts surveyed by FactSet, IBM on average is expected to post adjusted earnings of $2.52 a share, down from the estimated $2.60 a share at the beginning of the quarter and 2.58 a share in the year-ago third quarter. Estimize, a software platform that uses crowdsourcing to hedge fund executives and brokerages, buy-side analysts and others, calls for earnings of $2.60 a share.
Wall Street expects revenue of $17.79 billion from IBM, according to 13 analysts polled by FactSet. That s up from the $17.67 billion reported as the beginning of the quarter and the $17.56 billion forecast in the year-ago quarter. Estimize expects revenue of $17.9 billion.
Stock movement: IBM shares fell 5.2% compared with a 1.9% decline on the Dow Jones Industrial Average DJIA, a 0.2% advance on the S&P 500 index SPX and a 0.4% decline on the Nasdaq Composite Index COMP.
Stifel analyst David Grossman, who has a buy rating and a 151-price target, said that IBM can pull off what Executive Peterson says with the post-spinoff structure, but they need to be at the top of their game.
Management's growth targets are realistic vis-a-vis recent performance; however, they are aggressive with better execution, Grossman said.
For instance, with the software segment, which reaches about 40% of revenue, Grossman said that although it is not explicit in IBM's presentation, management seemed to suggest that acquisitions would contribute about one point to software growth, implying organic growth of 4%. As for consulting, which accounts about 30 % of the revenue, Grossman said he expects organic growth of about 7% to 9% or revenue growth of 5% to 7%.
Grossman, which makes up about 25% of revenue, said revenue is expected to stay flat, which is consistent with historical guidance and performance. Of the 18 analysts who cover IBM, four have buy or overweight ratings, 11 have hold ratings and two have sell or underweight ratings, with an average price target of $150.47