IBM Stock Slides After Revenue Miss

International Business Machines IBM continued over two straight years of earnings beats, reporting earnings of $2.68 per share (EPS) for the third quarter of 2019. Analysts at Zacks estimated that the company's EPS would come in at $2.64.

Despite beating Wall Street estimates, IBM's earnings have dropped significantly since the third quarter of 2018, when the company reported EPS of $3.42. The company, alongside other industry players, has been on a downward trend for several months. Still, IBM has outperformed the market this year.

The computer services giant has reported falling revenues for five consecutive quarters. The company's third quarter revenue came in at $18 billion, down 0.6% from the same quarter last year and missing analyst estimates by just over 1%. 

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 8%, while the latter increased 2%.

These are the same two segments that saw growth last quarter, when the cloud and cognitive software segment grew  5.4% and the global business services segment grew 3.4%.

"In the third quarter, as we continued to help clients with their digital reinventions, we grew revenue in our cloud & cognitive software segment and in global business services," IBM CEO Ginni Rometty 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." 

IBM closed its $34 million acquisition of Red Hat in July, so the third quarter marks the first time Red Hat's direct impact can be seen in the company's earnings. Revenue for Red Hat was up 20% this quarter, according to the IBM's earnings release.

IBM's systems segment was its worst performer, coming in at $1.5 billion, down 14% year-over-year. The systems segment includes systems hardware and operating systems software. Company leaders said this downward movement reflects "the end of the IBM z14 product cycle and shipping of the new IBM z15 in the last week of September." 

The systems segment was the company's weakest link last quarter as well, followed by global financing and global technology services. Global financing fell 11% year-over-year, which company leaders attributed to the "wind-down of OEM [original equipment manufacturer] commercial financing." Global technology services fell a smaller 4% year-over-year.

Chart: IBM

The company reported net cash from operating activities of $3.6 billion for the third quarter. IBM's free cash flow was $1.8 billion, and the company ended the third quarter with $11.0 billion of cash on hand.

"We continued our focus on the strength of our balance sheet in the third quarter," said James Kavanaugh, IBM senior vice president and chief financial officer. "We generated $12.3 billion in free cash flow over the last 12 months and with our disciplined financial management we reduced debt by nearly $7 billion in the quarter, while maintaining a strong cash balance." 

The company updated its full-year guidance to reflect the impact of the recent Red Hat acquisition in August. IBM now expects to achieve a full-year EPS of $12.80, down from $13.90 before adjustments were made.

IBM's stock was down 0.6% at market close on Wednesday, October 16.

Chart: FreightWaves SONAR

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