IBM reported 3Q earnings yesterday after the close posting in line (vs. cons) EPS of $2.68, driven by onetime below the line & tax items offsetting revenue and gross margin miss. The stock traded down 5% in the aftermarket. Heading into the print, the setup for the next twelve months was clear: execute into easing 2H CCS (organic) and GTS comps and begin 1H20 in a relatively favored position on RH deferred revenue headwinds. A false positive in GTS backlog and TSS pressures obfuscates the narrative. However, we see limited downside at current levels; meaningful catalysts (incl. z refresh driving profitability) skew more towards 2H20. We remain peer perform rated.
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Today IBM announced the release of its new z15 mainframe, carrying a ship date later this month. Headline improvements over the z14 include engine performance increase of 14% and system capacity increase of 25%. Additional functionality is focused on end customer hybrid multicloud environments with new capabilities around data privacy and recovery. Recall that mainframe hardware revenue represents ~3% of overall company revenue, but carries high (perhaps 90%) gross margins and drives services and software attach that together deliver 6-7x hardware’s contribution to revenue. Expectations for mainframe are low—we model a 21% decrease in 2H19 vs. 2H17 (z14 had one extra week in 2017) and we see the selling effort through the end of the year as potentially providing upside to the FY19 $12.80 EPS guide.
VARs see overall IT budget spend likely growing, albeit in the low single digits. One reseller mentioned that business had a sudden stepdown entering July. Another touched on global uncertainty; European deals stepped up CIO supervision in 70% of cases, leading to 20% uptick in sales cycle length. Overall, VARs recognize that 2018 provides a tough compare for enterprise spending, potentially exacerbated by recent signals of weakness, but they continue to see IT capture a larger share of overall corporate budgets.
We surveyed 50 value-added resellers of storage in the US, Europe, and APAC. The survey was taken in July, asking about April-June business though we may have picked up some July views. Takeaways include (1) the outlook for overall IT spending in 2019 improved over last quarter; (2) storage spending stepped down sequentially with nearly 75% reporting fair/ok sales strength; (3) NTAP’s outlook worsened vs. the prior period, while DELL sales and outlook remained steady (4) discounting ticked down across our coverage with DELL & PSTG seeing the largest changes.
IBM held its analyst day last Friday (8/2/19), its first combined entity event since deal close and a marker for its transition to chapter 2 of the customer digital reinvention. Management was focused in its messaging: tight IBM/Red Hat integration will drive execution in the $900bn TAM for hybrid cloud software and services. Discussion of AI and other drivers of the fuller cognitive enterprise was left for another day. Guidance of mid-single cc revenue growth over next two years a slight positive, but purchase accounting effects dragging into next year a negative.
John Treadway has worked with large enterprises considering both private and public cloud implementations, first at Cloud Technology Partners, which was acquired by HPE, and now at Symphony Solutions, where he is CEO. Although hyperscaler revenue growth is moderating, he argues it is mostly due to tough comparisons as cloud approaches $70bn of revenue. He says AWS’s Andy Jassy might be right that only 3% of workloads are in the cloud by dollars.
In addition to tracking the five major tech sectors—Hardware, Semis, Software, Internet, and Services—we have added 2-3 subsectors for each for greater granularity. We show their performance in our weekly Wolfebytes.
AWS gains decelerated from 41% in 1Q to 37% in 2Q and Microsoft from 73% to 64%, still solid results that suggest workloads continue to move to public clouds and capex should improve in the second half. Google Cloud’s stated $2bn includes G Suite. We don’t have history from the company, but our estimates suggest a doubling YoY as Thomas Kurian begins to triple its salesforce. Full-year growth for the top four should be about 40%. We are hosting cloud consultant John Treadway Tues at 2pm.
Tech was strong last week during the first wave of earnings. The Wolfe Tech Universe rose 2.9%, outpacing the S&P 500’s 1.7%. Despite trade issues and weakening auto/industrial demand, Semi stocks jumped 5.4% and passed Software in three-month performance (Exhibit 1). Top stocks this week included Snap (+28%), AMS AG (+27%), Teradyne (+23%), Flex (+15%), and Twitter (+13%). Laggards were PTC (-17%), Computershare (-7%), LG Display (-6%), Citrix (-6%), and Atos (-5%).
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