IBM (IBM 161.10, -8.95) has given up 5.3% in pre-market after reporting a modest earnings beat on light revenue. However, the slim bottom-line beat has been overshadowed by falling gross margins, sending the stock to levels not seen since early December.
The technology heavyweight reported above-consensus first quarter earnings of $2.38 per share on a 2.8% year-over-year decline in revenue to $18.16 billion, which was short of market expectations.
IBM is an established technology company that has had to reorient its approach in recent years. As a result, hardware sales have been on the decline while the company has increased its focus on strategic imperatives that include cloud offerings. Accordingly, strategic imperatives revenue grew 12.0% year-over-year to $7.80 billion while cloud revenue grew 33.0% year-over-year to $3.50 billion.
The Technology Services & Cloud Platforms segment accounts for the biggest chunk of total revenue (45.2%). That said, revenue in IBM's biggest segment declined 2.5% year-over-year to $8.20 billion during the first quarter. Furthermore, segment gross margin contracted to 38.9% from 40.9% one year ago.
Cognitive Solutions revenue grew 2.1% year-over-year to $4.10 billion. This was fueled by growth in analytics and security. However, gross margin declined to 77.3% from 82.0%.
Global Business Services revenue declined 3.0% to $4.00 billion and segment gross margin declined to 23.6% from 25.8%. Systems revenue fell 16.8% year-over-year to $1.40 billion with gross margin contracting to 47.5% from 57.2%.
IBM saw gross margin contractions across all segments, resulting in total gross margin falling to 42.8% from 46.5% one year ago.
Looking ahead, IBM reaffirmed its guidance for the fiscal year, expecting to generate earnings of at least $13.80 per share, which is just ahead of market expectations.