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IBM stock pops, then fizzles after executives decline to provide earnings forecast

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A pop in International Business Machines Corp. stock cooled Monday after Big Blue declined to provide an earnings forecast.

IBM IBM, -0.41% shares rose 2.6% in after-hours trading late Monday following a conference call in which executives shared their forecast, following an initial after-hours surge of more than 6% after the results showed a beat on earnings and revenue. In the conference call, executives underscored that revenue growth and free cash flow were the centerpiece of their 2022 forecast for IBM following the spinoff of the company’s managed infrastructure-service business, Kyndryl Holdings Inc. KD, +0.42%, and declined to give guidance for earnings per share, or EPS.

“I am not going to talk about EPS guidance,” Chief Financial Officer James Kavanaugh said on the call. “And by the way, EPS as you know quite well, there are many ways of getting to an EPS number.”

Predictions for full-year revenue growth were in-line with what analysts expected, according to FactSet, with the average prediction for 2022 calling for $59.48 billion, or a 3.7% increase from 2021.

“As we look to 2022, we expect mid-single-digit revenue growth before Kyndryl and currency and $10 billion to $10.5 billion of free cash flow for the year,” Chief Executive Arvind Krishna said on the call. “Both of these are consistent with our medium-term model.”

On the call, as analysts tried to pick apart the forecast, Kavanaugh characterized the free cash flow estimate as “all in,” and added some color to the mid-single-digit forecast.

“On top of that, in 2022, the new commercial relationship with Kyndryl will contribute an additional 3 points of growth spread across the first three quarters,” Kavanaugh said. “Currency dynamics unfortunately will be a headwind. At current spot rates, currency is roughly a two-point headwind to reported revenue growth for the year and three points in the first quarter.”

Kavanaugh also said he was not going to disclose “based on commercial competitive reasons around the profitability of Kyndryl overall,” but that it would be “a minimal component of the required operational profit improvement for 2022 overall.”

Kyndryl began trading on the NYSE on Nov. 4, a little more than a month into the fourth quarter. In IBM’s last earnings report, Krishna discouraged analysts from using of the word “disruption” related to the spinoff and stressed that he would characterize the transition as resulting in a “slight pause.”

That said, Kavanaugh said the company is going to have a “different business skew throughout 2022” in profitability skewed 40/60 to the second half of the year, with the first quarter expected to potentially be the lightest.

“Underneath that 40% in the first half is going to be skewed more toward second quarter just given the new introduction of our mainframe cycle, and also last year we had a very strong first-quarter mainframe,” Kavanaugh said.

Bernstein analyst Toni Sacconaghi, who has a market perform rating, said in a note ahead of the report that fourth-quarter results would be “messy, with jumbled consensus estimates,” specifically with Kyndryl revenues and earnings-per-share estimates.

IBM reported fourth-quarter net income of $2.33 billion, or $2.60 a share, compared with $1.36 billion, or $1.52 a share, in the year-ago period. Adjusted earnings, which excludes stock-based compensation expenses and other items, were $3.35 a share.

Revenue rose to $16.7 billion from $15.68 billion in the year-ago quarter. Analysts surveyed by FactSet expected adjusted earnings of $3.30 on revenue of $15.96 billion.

Following a change announced last quarter on how it would report business segments following the spinoff, IBM reported Software revenue of $7.3 billion, Consulting revenue of $4.7 billion and Infrastructure revenue of $4.4 billion.

Under the new reporting scheme, Software replaces “Cloud and Cognitive software,” Consulting replaces “Global Business Services,” and Infrastructure replaces “Systems,” along with those parts of “Global Technology Services” that weren’t included with the Kyndryl spinoff.

Analysts surveyed by FactSet had forecast “Cloud and Cognitive Software” revenue of $7.17 billion, “Global Business Services” revenue of $4.6 billion, “Global Technology Services” revenue of $3.58 billion and “Systems” revenue of $2.19 billion.

Earlier in January, one analyst downgraded IBM on concerns about revenue growth following the spinoff of Kyndryl and IBM’s ability to compete in the cloud market.

IBM shares closed Monday with a 0.4% decline in the regular session at $128.82, compared with a 0.3% gain by the Dow Jones Industrial Average DJIA, +0.29%, which counts it as a component. Over the past 12 months, IBM shares have gained nearly 14%, compared with an 11% rise by the Dow.

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