What to Watch When IBM Reports Earnings Next Week

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When International Business Machines (NYSE: IBM) reported its fourth-quarter financial results in January, investors got news they had waited nearly six long years to hear: The company had finally returned to growth after 22 consecutive quarters of year-over-year revenue declines.

Many believed, or at least hoped, that this would mark a turning point for the beleaguered tech giant, and IBM is scheduled to report its financial results for the first quarter on Tuesday, April 17, after the market close. The company has a lot riding on these results, so let's take a look at the numbers that will have investors sitting on the edge of their seats.

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It's all about the revenue growth

For the fourth quarter of 2017, IBM's revenue of $22.5 billion grew 3.5% year over year. In addition to the long-awaited revenue gains, the company's operating income grew 3% year over year, generating earnings per share of $5.18, excluding one-time items. Including the $5.5 billion charge related to recently passed U.S. tax legislation, IBM produced a loss of $1.14 per share.

For 2018, the company plans to report at least $13.80 in operating earnings per share -- exactly what it produced in 2017. The company believes it will generate between 17% and 18% of that in the first quarter -- or between $2.34 and $2.48. The company was cagey about revenue, saying only that, "we're entering 2018 with a stronger revenue profile than a year ago." For reference, the company reported $18.2 billion in revenue for the first quarter of last year. IBM also expects margins to stabilize and is forecasting free cash flow for the year of about $12 billion.

Analysts' consensus estimates for the first quarter are calling for revenue of $18.71 billion, up 3.1% year over year, as well as adjusted earnings per share of $2.39, near the midpoint of IBM's guidance, and up slightly over the prior-year quarter.

IBM has been in the midst of an ongoing transition, jettisoning some of its legacy businesses and focusing on high-growth initiatives that include analytics, cloud computing, artificial intelligence (AI), security, and mobile -- all of which the company calls its strategic imperatives. In the fourth quarter, these activities resulted in quarterly sales of $11.1 billion, up 17% over the prior-year quarter.

Investors will be looking for increases from these newer technologies, which generated $36.5 billion in 2017, up 11% year over year, and grew to represent 46% of IBM's total revenue.

Can it continue?

Looking ahead, investors will be keenly interested in what IBM has to say about the second quarter. Considering its recent return to revenue growth, investors will not only want that to continue in the current quarter, but will have expectations that the company will keep this newly initiated streak alive.

Last year, the company produced just over 24% of its full-year revenue during the second quarter. Assuming similar revenue to last year, we should expect the company to forecast sales that exceed $19.3 billion for the second quarter of 2018. Similarly, using last year's numbers as a benchmark, investors should expect guidance of at least $2.97 in operating earnings per share.

IBM will be riding the razor's edge when it reports financial results. Last quarter's return to revenue growth bought the company some time with investors, as their patience is wearing thin. To stay in the market's good graces, however, IBM will have to keep delivering growth.

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Danny Vena has the following options: long January 2019 $165 calls on IBM. The Motley Fool is short shares of IBM. The Motley Fool has a disclosure policy.