IBM Q3 earnings decline but beat Street view; stock drops on revenue miss

Technology giant International Business Machines Corp. (NYSE: IBM), which closed the high-value acquisition of open-source software firm Red Hat a few months ago, reported lower earnings and revenues for the third quarter of 2019. While earnings exceeded the market’s prediction, revenues missed. The company’s stock slipped during Wednesday’s extended trading session, immediately after the announcement.

At $2.68 per share, third-quarter adjusted earnings were down 22% from the year-ago period, but slightly above the consensus estimate. Net profit, on an unadjusted basis, dropped to $1.67 billion or $1.87 per share from $2.69 billion or $2.94 per share in the third quarter of last year.

Revenue Down 4%

The weak bottom-line performance reflects a 4% decline in revenues to $18.03 billion, which also missed the Street view. Higher revenues at Cloud & Cognitive Software and Global Business Services was more than offset by muted performance by the other divisions.

Cloud & Cognitive Software revenues grew 6.4% to $5.28 billion and Global Business Services revenues moved up 1% to $4.12 billion. Meanwhile, Global Technology Services registered a 5.6% decline.

Also see: IBM Q2 2019 Earnings Conference Call Transcript

Ginni Rometti, IBM’s CEO, said, “Our results demonstrate that clients see IBM and Red Hat as a powerful combination and they trust us to provide them with the open hybrid cloud technology, innovation and industry expertise to help them shift their mission-critical workloads to the cloud.”

Outlook

Looking ahead, the management expects full-year 2019 earnings, on an unadjusted basis, to be $10.58 per share and adjusted earnings per share to be at least $12.80, which includes costs related to amortization of purchased intangible assets and other acquisition-related charges. Meanwhile, it continues to expect free cash flow of approximately $12 billion.

Will Red Hat Help?

A section of market watchers was skeptical about the $34-billion Red Hat deal, due to the risk element. There is apprehension that the huge premium paid to the software firm might weaken IBM’s liquidity, forcing the Big Blue to reduce share buybacks in the coming years.

The company’s shares, with a consensus rating of moderate buy, has gained about 23% since the beginning of 2019 after slipping to multi-year low towards the end of last year. The stock traded lower during Wednesday’s regular session and lost further in the after hours following the announcement.

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