IBM’s Q1 Sees Break From Mainframe Cyclicality
Market volatility and security concerns increased mainframe capacity needs, leading to nearly 50% year-over-year growth in the seventh quarter since the z15 model’s launch.
IBM’s IBM first quarter results came in above our expectations as its consulting business started to pick up--and its z15 mainframes unexpectedly took a turn for the better--breaking from expected market cyclicality. Market volatility and security concerns increased mainframe capacity needs, leading to nearly 50% year-over-year growth in the seventh quarter since the z15 model’s launch. Despite the impressive breach of typical trends, IBM doesn’t expect such anomalous activity in the smaller systems segment to continue--as it reiterates guidance for 2021 which includes revenue growth. We think top-line growth is feasible due to the easy compare from a hard-hit 2020 as well as our belief that global business services, which is now growing, is a harbinger for recovery throughout the rest of the business. All in all, we’re maintaining our fair value estimate of $125 per share for the narrow-moat IT services provider, which leaves the company fairly valued.
IBM reported revenue of $17.7 billion in the quarter, marking a 1% year-over-year increase. Cloud and cognitive, and systems tied for the best performing segments, both reporting revenue growth of 4% year over year. In the former segment, Cloud Paks software saw robust growth. In the latter, much smaller segment, the z15 mainframe broke from expected cyclicality, driven by increased market volatility and security concerns that caused a flock to mainframes. Mainframe revenues grew by 49% year over year off an incredibly difficult comparison of 60% growth in the prior year period. The global business services segment returned to year-over-year revenue growth, increasing by 2%, due to consulting services seeing a recovery. However, the global financing division continued to suffer the worst performance, with revenue down by 20% year over year. Yet, the significant decline is a result of IBM’s conscious decision to reduce financing receivables.
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