It has been about a month since the last earnings report for IBM (IBM). Shares have lost about 2% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is IBM due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

IBM Beats Q4 Earnings Estimates on Solid Cloud & AI Traction

IBM reported strong fourth-quarter 2024 results, with adjusted earnings and revenues beating the respective Zacks Consensus Estimate.

The company witnessed healthy demand trends for hybrid cloud and artificial intelligence (AI) solutions with a client-focused portfolio and broad-based growth. IBM exceeded the target metrics related to revenue, profitability and cash flow growth that it laid out for the three-year mid-term model at the end of 2021. Despite economic uncertainty due to geopolitical issues, supply chain vulnerabilities, incessant cyber threats and the evolving landscape of interest rates and inflation levels, the company expects to deliver sustainable growth with advanced technology and deep consulting expertise.

Net Income

On a GAAP basis, net income for the reported quarter was $2.91 billion or $3.09 per share compared with $3.29 billion or $3.55 per share in the year-ago quarter. The significant decline in GAAP earnings was due to high operating expenses.

Excluding non-recurring items, non-GAAP net income from continuing operations was $3.92 per share compared with $3.87 in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 19 cents.

For 2024, IBM reported net income of $6.02 billion or $6.43 per share compared with $7.5 billion or $8.14 per share in 2023. Non-GAAP net income from continuing operations was $10.33 per share compared with $9.62 in 2023.

Quarter Details

Quarterly total revenues increased to $17.55 billion from $17.38 billion on strong demand for hybrid cloud and AI, driving growth in the Software segment. On a constant currency basis, revenues were up 2% year over year. The top line exceeded the consensus estimate of $17.51 billion. 

Gross profit improved to $10.44 billion from $10.23 billion in the prior-year quarter, resulting in respective gross margins of 59.5% and 59.1% owing to a strong portfolio mix. Total expenses increased to $7.13 billion from $6.51 billion due to higher selling, general and administrative expenses and research and development costs.

Segmental Performance

Software: Revenues improved to $7.92 billion from $7.18 billion, driven by growth in Red Hat (up 17%), Automation (16%), Data & AI (5%), Security (5%) and Transaction Processing (11%). The segment’s revenues beat our estimate of $7.43 billion on solid hybrid cloud traction. Segment profit was $3.1 billion compared with $2.6 billion in the year-ago quarter for margins of 39.2% and 36.9%, respectively. The company is witnessing healthy hybrid cloud adoption by clients and solid demand trends across RedHat, automation and generative AI offerings like watsonx.

Consulting: Revenues were $5.17 billion compared with $5.28 billion a year ago as clients prioritized spending and pulled back on discretionary projects. The segment’s revenues missed our estimate of $5.39 billion. Segment profit declined to $606 million from $654 million for margins of 11.7% and 12.4%, respectively.

Infrastructure: Revenues were $4.26 billion compared with $4.6 billion on lower demand for hybrid and distributed infrastructure, reflecting product cycle dynamics. Segment profit was $1.06 billion compared with $1.3 billion in the year-ago quarter, owing to higher investments in the business across areas like AI, hybrid cloud and quantum, for respective margins of 25% and 28.2%.

Financing: Revenues declined to $170 million from $175 million a year ago. Segment profit was down to $94 million from $117 million in the year-ago quarter for respective margins of 55% and 67%.

Cash Flow & Liquidity

During the quarter, IBM generated $4.33 billion in cash from operations compared with $4.46 billion in the year-ago quarter, bringing the respective tallies for 2024 and 2023 to $13.44 billion and $13.93 billion. Free cash flow was $6.16 billion in the quarter, up from $6.09 billion in the prior-year period, driven by higher profit and working capital efficiencies. As of Dec. 31, 2024, the company had $13.95 billion in cash and cash equivalents with $49.88 billion of long-term debt compared with respective tallies of $13.07 billion and $50.12 billion a year ago.

Outlook

For 2025, the company expects revenues to grow at least 5% on a constant currency basis driven by a strong portfolio mix, operating leverage and yield from productivity initiatives. Free cash flow is expected to be in the vicinity of $13.5 billion.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

The consensus estimate has shifted -9.1% due to these changes.

VGM Scores

At this time, IBM has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, IBM has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

Performance of an Industry Player

IBM is part of the Zacks Computer - Integrated Systems industry. Over the past month, Seagate (STX), a stock from the same industry, has gained 2.4%. The company reported its results for the quarter ended December 2024 more than a month ago.

Seagate reported revenues of $2.33 billion in the last reported quarter, representing a year-over-year change of +49.5%. EPS of $2.03 for the same period compares with $0.12 a year ago.

Seagate is expected to post earnings of $1.74 per share for the current quarter, representing a year-over-year change of +427.3%. Over the last 30 days, the Zacks Consensus Estimate has changed -3.1%.

Seagate has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of C.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

International Business Machines Corporation (IBM) : Free Stock Analysis Report

Seagate Technology Holdings PLC (STX) : Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research