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Barclays Expects IBM's Cost Cuts To More Than Offset Weak Revenue

International Business Machines Corp. IBM has been aggressively cutting costs to counter the adverse impact of cloud disruption, Barclays’ Mark Moskowitz said in a report. He maintained an Underweight rating on the company, while raising the price target from $125 to $140.

Since a significant part of IBM’s cloud-based revenue can have low margins in the first couple of years of deployment, the company has been focusing on reducing costs aggressively, analyst Mark Moskowitz noted.

“Teeter Totter” Effect

While IBM continues to struggle with revenue weakness, it may have been able to offset this with aggressive cost cuts. Moskowitz lowered the revenue estimates for the June quarter and 2016 from $19.6Bn to $19.5Bn and from $78.3Bn to $77.8Bn, respectively. At the same time, the operating margin estimates have been raised from 17.5 percent to 18.4 percent and from 18.5 percent to 18.9 percent, respectively.

The EPS estimates for FY1 and FY2 have been raised from $13.32 to $13.48 and from $13.51 to $13.87, respectively.

Middleware Still A Challenge

“Despite growth in IBM's strategic imperatives, middleware continues to be the company's profit engine,” the analyst wrote. He expects middleware to continue to be at risk, with an estimated 30-35 percent of middleware revenue being related to SMB customers, who are more likely to move to cloud over time.

While IBM’s margins may be boosted by cost cuts, this does not seem sufficient to “become more constructive on the stock,” Moskowitz commented.

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