International Business Machines Corp. shares fell in the extended session Tuesday after the tech giant topped Wall Street expectations for quarterly earnings but not for revenue, which declined again as it had done for years before 2018.
IBM IBM, +2.83% shares fell 4% after hours, following a 2.8% rise to close the regular session at $145.12. On Tuesday, both the Dow Jones Industrial Average DJIA, +2.17% and the S&P 500 index SPX, +2.15% gained 2.2%, and the tech-heavy Nasdaq Composite Index COMP, +2.89% finished up 2.9%.
IBM reported third-quarter net income of $2.69 billion, or $2.95 a share, compared with $2.73 billion, or $2.92 a share, in the year-ago period. Adjusted earnings were $3.42 a share. Analysts surveyed by FactSet had expected adjusted earnings of $3.40 a share.
Revenue declined to $18.76 billion from $19.15 billion in the year-ago period. Wall Street expected revenue of $19.1 billion from IBM, while Estimize expected revenue of $19.27 billion.
IBM broke a sad streak of 23 consecutive quarters of declining revenue in January, and had managed to produce growth in two consecutive quarters until Tuesday’s report broke that shorter streak. Some of IBM’s newer businesses, which have been expected for years to make up for the decline of legacy businesses, did not produce as needed to avoid the dip.
Cognitive solutions, which includes Watson, was one of IBM’s poorest-performing segments in this earnings report. The unit’s revenue fell 6% to $4.1 billion from the year ago quarter, while analysts expected a revenue decline of 2% to $4.31 billion.
Technology services and cloud-platform — which includes IBM Cloud, formerly known as Bluemix — posted revenue flat from the year before at $8.3 billion, while analysts expected $8.43 billion.
Cloud revenue was good given the competition, but that’s turning into a commodity market, as opposed to AI and security, which command better margins, said Maribel Lopez, principal analyst at Lopez Research.
“On the cloud side, IBM did better last quarter than they were given credit for, but whether they can show continued momentum this quarter and in the coming quarters is a big unknown,” Lopez told MarketWatch, adding that Microsoft Corp. MSFT, +3.16% has turned out to be a formidable competitor in the space.
“On the downside, cognitive services are proving harder to sell than any vendor had imaged,” Lopez said.
Global business services revenue rose 1% to $4.1 billion from the year ago period, while Wall Street expected a decline 0.7% to $4.06 billion. Systems revenue rose 1% to $1.7 billion, while analysts had forecast $1.78 billion.
Global business services includes consulting for modernizing business design and enterprise and cloud applications, while the systems business includes operating-systems software and the company’s mainframe business, including IBM’s z14 line of servers.
Of the 24 analysts who cover IBM, 10 have buy or overweight ratings, 11 have hold ratings and three have sell or underweight ratings, with an average price target of $163.77, according to FactSet.
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