IBM reports better-than-expected earnings, maintains full-year guidance

Virginia 'Ginni' Rometty, chief executive officer of International Business Machines

Jason Alden | Bloomberg | Getty Images

IBM reported better-than-expected second-quarter earnings on Wednesday, but the stock bounced around after hours as the company's guidance for the year held steady.

Shares of IBM initially rose as much as 4% but later lost their gains and were later down more than 1%.

Here are the key numbers:

• Earnings: $3.17 per share, excluding certain items, vs. $3.07 per share as expected by analysts, according to Refinitiv.
• Revenue: $19.16 billion, vs. $19.16 billion as expected by analysts, according to Refinitiv.

IBM's revenue fell 4% from a year earlier even as earnings grew 3%, the company said in a statement. Year-over-year revenue has now declined for the fourth quarter in a row.

IBM's biggest business segment, Global Technology Services — which includes technology support services as well as infrastructure and cloud services — produced $6.84 billion in revenue, down almost 7% and below the $7 billion consensus estimate among analysts surveyed by FactSet.

The GTS business is "declining ~3% as the company repositions this portfolio for higher profitability and growth," Stifel analysts led by David Grossman wrote in a note on July 9. "Declines are likely to remain at these levels through most of this year as the company exits lower margin capital intensive business and culls low growth/margin relationships from the portfolio."

The Cloud and Cognitive Software unit — including cloud and data platforms, cognitive applications and transaction processing platforms — contributed $5.65 billion in revenue, above the FactSet consensus estimate of $5.55 billion.

IBM's Global Business Services segment, which includes application management, consulting and global process services, had revenue of $4.16 billion, just under the $4.17 billion FactSet estimate.

Systems revenue totaled $1.75 billion, down almost 20% and shy of the $1.82 billion mean FactSet estimate. IBM said growth from the Power product line more than offset the impact from "product cycle dynamics" in the company's storage and Z mainframe-computer products. The Z line in past quarters helped to lift IBM's revenue as businesses made upgrades, but now it making for tougher comparisons.

In the second quarter, IBM announced a partnership with Cloudera and the sale of commerce and marketing software properties to funds advised by affiliates of Centerbridge Partners. The company also announced layoffs.

And in the quarter IBM took a charge because of "an unfavorable legal ruling" in a case against the state of Indiana that had been outstanding for around 10 years, James Kavanaugh, the company's senior vice president and chief financial officer, told analysts on a Wednesday conference call.

On the call Toni Sacconaghi from Bernstein Research said he believed IBM's backlog was the worst it's been in 20 years.

Kavanaugh said that large deals in the quarter were down 20% on an annualized basis.

"Signings are not all equal. Signings vary," he said.

IBM closed its $34 billion acquisition of Red Hat earlier this month.

"Earlier in July, we reduced our EPS estimates while noting the risk that management might need to walk back its EPS expectations," Argus Research analyst Jim Kelleher wrote in a note distributed to clients on Thursday. "Even with the Red Hat acquisition, we remain concerned that IBM may have lost momentum in its strategic transformation." Kelleher has a hold rating on the stock.

IBM reiterated full-year guidance of at least $13.90 in earnings per share, excluding certain items like Red Hat. That's inline with analyst estimates, according to Refinitiv. The company said it will provide updated guidance on Aug. 2, to reflect the impact of Red Hat.

IBM shares are up about 26% since the beginning of 2019.

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