Earnings Outlook: IBM earnings: Focus shifts back to legacy revenue as Red Hat settles in

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International Business Machines Corp. short-term stock performance will depend on the company’s global technology services business even though much attention has been shifted to the recent acquisition of Red Hat Inc.

IBM IBM, +1.15%  is scheduled to report third-quarter earnings after the bell on Wednesday.

Red Hat was acquired for about $34 billion by IBM in July in a deal that was announced a year ago and served as a focus of the company’s last earnings.

This time around IBM is going to have to show a turnaround in some of its legacy businesses that still make up a big part of sales, like Global Technology Services, said Stifel analyst David Grossman, who has a buy rating and a $169 price target on the stock.

“While most of the attention has shifted to Red Hat, our model does not assume a material contribution from revenue synergies,” Grossman said.

“Rather, we believe near-term growth and stock performance will hinge on IBM’s ability to improve the fundamental performance of the legacy core, primarily GTS (~35% of revenue),” he said.

Analysts surveyed by FactSet expect GTS revenue of $6.77 billion from IBM, compared with $8.29 billion in the year-ago period.

Earnings: Of the 17 analysts surveyed by FactSet, IBM on average is expected to post adjusted earnings of $2.67 a share, down from the $3.54 a share expected at the beginning of the quarter and the $3.42 a share reported in the year-ago quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of $2.71 a share.

Revenue: Wall Street expects revenue of $18.22 billion from IBM, according to 16 analysts polled by FactSet. That’s slightly down from the $18.25 billion forecast at the beginning of the quarter and the $18.76 billion reported in the year-ago quarter. Estimize expects revenue of $18.31 billion.

In addition to GTS revenue, analysts expect cloud and cognitive services revenue of $5.44 billion from IBM, along with global business services revenue of $4.12 billion, and systems revenue of $1.52 billion.

The only major segment expected to grow from the year-ago period is cloud and cognitive services with a 31% gain.

Stock movement: IBM shares have declined 0.2% since the company’s last earnings report. In comparison, the Dow Jones Industrial Average DJIA, +1.21%  declined 1.5%, the S&P 500 SPX, +1.09%  has slipped 0.5%, and the tech-heavy Nasdaq Composite Index COMP, +1.34%  has declined 1.6%.

What analysts are saying: Of the 22 analysts who cover IBM, seven have buy or overweight ratings, 13 have hold ratings and two have sell or underweight ratings, with an average price target of $153.79, or 7.7% higher than Friday’s close.