Street Calls of the Week
Investing.com -- International Business Machines (NYSE:IBM) reported third-quarter earnings that exceeded analyst expectations, but shares tumbled at the open on Thursday, falling over 7%, as investors focused on the company’s tempered revenue growth outlook and slowing cloud growth.
The technology giant posted adjusted earnings per share of $2.65, beating the analyst estimate of $2.44 by $0.21. Revenue came in at $16.33 billion, surpassing the consensus estimate of $16.09 billion and representing a 9% increase YoY, or 7% at constant currency.
Despite the strong quarterly performance, IBM stock dropped sharply after the company projected constant currency revenue growth of more than 5% for the full year, suggesting a slowdown from the current quarter’s 7% growth rate. The company also raised its free cash flow guidance to about $14 billion for the full year.
Moreover, revenue growth in IBM’s hybrid cloud division, Red Hat, slowed to 14% in the quarter, down from 16% in the prior period, also weighing on the share price.
"This quarter we accelerated performance across all of our segments, and again exceeded expectations for revenue, profit and free cash flow," said Arvind Krishna, IBM chairman, president and chief executive officer. "Clients globally continue to leverage our technology and domain expertise to drive productivity in their operations and deliver real business value with AI."
IBM’s Software segment led growth with a 10% revenue increase to $7.2 billion, while Infrastructure revenue jumped 17% to $3.6 billion, driven by a 61% surge in IBM Z systems. Consulting revenue grew more modestly at 3% to $5.3 billion.
"New innovation, the strength and diversity of our portfolio, and our disciplined execution led to acceleration in revenue growth and profit in the quarter," said James Kavanaugh, IBM senior vice president and chief financial officer.
The company’s AI book of business now stands at more than $9.5 billion, highlighting IBM’s continued focus on artificial intelligence solutions. Gross profit margin improved to 58.7% on an adjusted basis, up 1.2 percentage points from the previous year.
IBM generated $3.1 billion in net cash from operating activities during the quarter and returned $1.6 billion to shareholders in dividends.
Commenting on the report, Stifel analysts said the “software reset likely weighs on the stock near-term,” though they view the longer-term outlook as more stable.
"Fundamentally, business remains solid and we reiterate our Buy; however, defensive- minded investors may experience some short-term softness," they noted.
(Luke Juricic contributed to this report.)