IBM (IBM 135.35, -9.77, -6.73%) trades to two-and-a-half year lows today as revenue declines returned after a few quarters in a row of growth, gross margins narrowly missed expectations, and management reaffirmed guidance.
Getting a bit more granular on the print, IBM reported Q3 earnings per share (EPS) which narrowly beat market views at $3.42. Revenue came in below market expectations, down 2.1% from last year, to $18.76 bln as slower than expected AI and cloud growth weighed on the quarter.
Margins on a pre-tax basis were up 50 basis points to 19.2%, from 18.7% a year ago benefiting somewhat from lower SG&A and improved margin stabilization.
Q3 segment breakdown:
- Cognitive Solutions, which includes solutions software and transaction processing software, saw revenue declines of 6% (down 5% in constant currency) to $4.1 bln.
- Global Business Services, which includes consulting, application management and global process services, reported Q3 revenue growth of 1% to $4.1 bln (or up 3% in constant currency.
- Technology Services & Cloud Platforms, which includes infrastructure services, technical support services and integration software, reported revenue declines of 2% (flat in constant currency) to $8.3 bln.
- Systems, which includes systems hardware and operating systems software, reported Q3 revenues of $1.7 bln, up 1% (and up 2% in constant currency), driven by growth in Power and IBM Z.
- Global Financing, which includes financing and used equipment sales, saw revenues of $388 mln, down 9% (or down 7% in constant currency.)
Also, IBM backed its previous FY18 EPS outlook; the company continues to expect non-GAAP EPS of at least $13.80. Further, IBM left FCF guidance unchanged at approximately $12 bln, with a realization rate greater than 100%, as management highlighted expected cash taxes and CapEx are largely behind IBM.
On the call last night IBM management reiterated that at the beginning of the year, the company gave expectations for three headwinds to FCF growth in FY18: higher CapEx, higher cash taxes and IBM’s strong working capital performance at the end of last year driven by the IBM Z introduction. The combined impact from cash taxes and capital investments is in line with what IBM had expected at this point, though admittedly the company has spent a little more on CapEx and a little less on cash taxes.
The concern continues to be IBM’s ability to grow the business, which has seen its fair share of contraction over the past few years. Management is attempting to turn the business to higher margin, lower cost cloud operations but the traction seems to have slowed in Q3 as indications are that the company failed to sign any new cloud business. Not all is lost, though, as IBM held firm on guidance and reported some growth in GBS and Systems, though those businesses may eventually give way in size to cloud – or at least that’s IBM’s plan.