International Business Machines Corp. (NYSE: IBM) is set to report earnings after the close on Monday. While Big Blue is a Dow Jones Industrial Average (DJIA) component, IBM’s report now bleeds over into fewer technology giants than it did in years past. The long and short of the matter is that IBM has been a continuous disappointment due to erosion and stagnation in its core IT-services operations. IBM is also finding it very hard to generate real growth, when you add up all of its business units.

Thomson Reuters has its consensus estimate for this third-quarter report pegged at $3.30 in earnings per (EPS) share (versus $3.68 for the same quarter in 2014), and revenue is expected to be down 12.4% at $19.62 billion for the quarter. IBM uses the buybacks and cost cuts to keep earnings high, which is why there is constant chatter about financially engineering when it comes to its earnings report.

As a reminder, IBM is the second largest weighting in the DJIA, with almost 6% of the Dow’s cumulative weighting of the 30 stocks. That means that if IBM drops or rises big that it can swing the Dow, even if the rest of its spillover is muted in the tech sector.

IBM generally offers guidance, and these are the following consensus estimates, versus prior reports as well:

• Q4-2015: $5.61 EPS (versus $5.81 a year ago) on a 6% revenue drop to $22.67 billion.
• FY-2015: $15.68 EPS (versus $16.53 a year ago) on a 10.8% revenue drop to $82.8 billion.
• FY-2016: $16.06 EPS (versus expected $15.68 prior) on a 1% revenue drop to $81.94 billion.

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When IBM last reported earnings, it gave full-year 2015 guidance as follows:

IBM expects full-year 2015 GAAP diluted earnings per share of $14.25 to $15.00, and operating (non-GAAP) diluted earnings per share of $15.75 to $16.50. IBM now expects a modest increase in free cash flow, improved from its prior expectation of flat year-to-year performance. The 2015 operating (non-GAAP) earnings expectation excludes $1.50 per share of charges for amortization of purchased intangible assets, other acquisition-related charges and retirement-related charges.

One key issue that 24/7 Wall St. focuses on is IBM’s “services backlog.” This is the company’s book of future orders that have been committed but that have not yet been booked. IBM represented that the $122 billion in services backlog was up more than 1% last quarter, adjusted for currency. While that backlog is massive, last summer it was $136 billion, and it is still down from a peak of around $140 billion. At the end of 2014, IBM’s backlog totaled $128 billion.

What IBM does have working for it is its newer businesses, or its strategic imperatives. This includes its cloud, analytics, and engagement segments (like Watson etc.), and those revenues were up over 20% so far in 2015. Those revenues would have been up over 30% if you adjust for currency and the divested System x business. The company had given year-to-date gains as follows in its second quarter:

• Total cloud revenues up over 50% and is $8.7 billion over the last 12 months (adjusted for the divested System x business). The annual run rate for cloud delivered as a service increased to $4.5 billion from $2.8 billion in the second quarter of 2014.
• Revenues from business analytics rose over 10% year-to-date.
• Revenues from mobile more than quadrupled, and social revenues increased more than 30%.

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Other key business segments with quarterly revenue were down, but the numbers all would have been much better outside of currency adjustments, and if you account for the divested System x business. Those skew the numbers, but it shows a lot of why IBM’s growth is stunted, as follows:

• Global Technology Services revenue was down 10% to $8.1 billion.
• Software revenues were down 10% to $5.8 billion.
• Systems Hardware revenue was down 32% to $2.1 billion for the quarter.
• Global Financing segment revenues fell 5% to $0.5 billion.

Now add up the core-IBM outside of the strategic imperatives and you get $16.5 billion of the total $20.8 billion in revenues. Key here is that 20% or so of the total business cannot act as a driver for the rest of the larger legacy operations. This is the Achilles’ heel for IBM, and that may be the case for many quarters ahead.

The last issue to consider is how much IBM spends buying back its stock. In the second quarter alone, IBM spent $2.3 billion on share buybacks (and another $2.4 billion in dividends). IBM spent $1.1 billion in dividends and $1.2 billion in share buybacks during the first quarter of 2015.

We can always make room for the currency adjustments and the System x business, but what matters is that the above comparisons should let you know why IBM is so out of favor. IBM’s most recent closing bell price was $150.39, versus a consensus analyst price target of $157.32 and a 52-week range of $140.56 to $176.30.

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