ibm earnings

IBM stock is trading sharply lower in US premarket price action today. The company posted its Q2 2022 earnings yesterday after the close of US markets and positively surprised both on the topline as well as the bottomline.

IBM’s second quarter revenues increased 9% as compared to the corresponding quarter last year and reached $15.5 billion. The reading came in ahead of analysts’ estimates. Notably, on a constant currency basis, the sales increased by 16%.

The US dollar has strengthened this year which is hurting the sales of multinational US companies which get a large part of their sales from overseas. Microsoft expects to take a hit from the stronger dollar and other tech names like Apple, Alphabet, and Netflix are also expected to take a hit from the dollar when they report later this month.

Around 5% of IBM’s sales in the quarter were to Kyndryl, its managed infrastructure business which was spun off into a publicly traded company in November. IBM posted an adjusted EPS of $2.31 in the second quarter which was ahead of the $2.27 that analysts were expecting.

Commenting on the earnings, IBM CFO James Kavanaugh said, “Our recurring revenue stream and solid cash generation position us well to continue to invest in R&D, acquire new companies, and strengthen our talent in every part of the business, while also returning value to shareholders through our dividend.”

Meanwhile, the company lowered its full-year cash flow guidance to $10 billion, from the previous guidance of $10-$10.5 billion. It blamed the stronger US dollar and its decision to exit Russia for the lower guidance. Kavanaugh termed the operations in Russia as “a very highly-profitable business.”

Netflix has Also Exited Russia, which Took a Toll on Its Subscribers

Several US companies have exited Russia after it invaded Ukraine. However, it is also impacting the earnings in the short term.

Netflix for instance, reported a fall of 200,000 subscribers in the first quarter of 2022 after it exited Russia. While its subscriber growth would anyways have been lower than the guidance, it would still have added subscribers in the quarter, if not for the Russia exit. The company is now looking at an ad-supported tier to revive its sagging growth and has partnered with Microsoft for the venture.

Like fellow US companies, the multi-decade high inflation, which hit 9.1% in June is also negatively impacting IBM. During the earnings call, Kavanaugh said, “Consulting, which makes up well over half of IBM’s workforce, is most impacted by the inflationary labor market and increasing labor cost as we bring new talent on board and increase capacity.” He added that the higher costs would eventually reflect in its contracts but in the meanwhile, inflation has taken a toll on its gross margins.

IBM is a Play on Web3 Also

IBM stock is outperforming the markets this year and is in the green, despite the S&P 500 losing almost 20% in the year. Investors have pivoted towards value and dividend-paying stocks in 2022 amid the market crash. IBM is among the dividend aristocrats with a dividend yield of almost 4.8%.

IBM is also a play on Web3, AI, and blockchain and analysts expect these businesses to drive its long-term growth. It is trading 5.5% lower in premarkets today and has a 52-week trading range of $114.56-$144.73. The stock is trading near its 52-week highs even as many tech stocks recently fell to their 52-week lows.

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