IBM Beats Earnings Estimate Despite Falling Revenue

International Business Machines IBM surpassed earnings expectations for the second quarter of 2019. The company reported earnings of $3.17 per share (EPS), significantly higher than the consensus estimate of $3.08.

IBM has surpassed EPS estimates every quarter over the past two years, and this beat allows the computer services giant to continue its streak. The company, along with other industry players, has been on a downtrend over the past few months. According to a recent Zacks report, IBM's earnings beat could help reverse the trend.

The company's second quarter revenue came in at $19.2 billion, down 4.2 percent year-over-year, but basically aligned with analyst estimates. This is the fourth consecutive quarter IBM has reported falling revenues.

Chart: IBM

Despite a drop in total revenue, the company reported revenue growth in both its cloud and cognitive software segment and its global business services segment. The former climbed 5.4 percent, while the latter climbed 3.4 percent.

"In the second quarter, we continued to grow in the high-value areas of the business, led by a strong performance across our cloud and cognitive software segment," IBM CEO Ginni Rometty said in the company's earnings release.

IBM's systems segment was its worst performer, coming in at $1.8 billion, down 18 percent year-over-year. The systems segment includes systems hardware and operating systems software. Company leaders cited the impact of "product cycle dynamics" for the steep decline. 

Other falling segments include global technology services, down 3.5 percent year-over-year, and global financing, down 8.5 percent year-over-year.

Chart: IBM

IBM's gross profit margin climbed 100 basis points in the second quarter, accounting for the largest year-over-year expansion the company has seen in the past five years. The company reported net cash from operating activities of $16.1 billion over the past year and free cash flow of $12.7 billion in that same time frame. 

"We maintained our momentum in the second quarter, again expanding gross profit margin and growing free cash flow, driven to a great extent by our increasing mix of high-value offerings for clients," IBM Chief Financial Officer James Kavanaugh said. 

IBM closed its $34 million acquisition of Red Hat earlier this month, meaning the acquisition did not have a direct impact on second quarter earnings. Still, Rometty addressed the acquisition with optimism.

"With the completion of our acquisition of Red Hat, we will provide the only true open hybrid multi-cloud platform in the industry, strengthening our leadership position and uniquely helping clients succeed in chapter two of their digital reinventions," Rometty said.

The company will update its full-year guidance to reflect the impact of the recent Red Hat acquisition on August 2. Through the second quarter, however, IBM is still on-track to achieve a full-year EPS of $13.90.

Company leaders expect Red Hat to contribute to free cash flow in the first year and be accretive to EPS by the end of the second year after closing.

IBM's stock closed at $143.07 Wednesday, down 0.28 percent. The company released earnings after market close.

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