IBM down on disappointing guidance

Key Points
  • The company beat estimates on earnings and revenue, but full-year guidance was below consensus.
  • IBM has now posted revenue growth for the second quarter in a row.
IBM stock drops after beating estimates
IBM stock drops after beating estimates

IBM stock fell 6 percent after the company reported better-than-expected earnings for the first quarter on Tuesday.

- Earnings: $2.45 per share, excluding certain items, vs. $2.42 per share expected by analysts, according to Thomson Reuters.

- Revenue: $19.1 billion, vs. $18.84 billion as expected by analysts, according to Thomson Reuters.

Last quarter, IBM announced revenue growth from the year-ago quarter for the first time in more than five years. That streak is now continuing for a second quarter.

But in a statement the company reaffirmed its previous guidance of at least $13.80 in earnings per share, excluding certain items, for the full year of 2018, while analysts polled by FactSet had expected $13.83 per share, according to Thomson Reuters.

Cantor Fitzgerald analysts led by Joseph Foresi said in a Friday note that they were expecting IBM to report gains from companies upgrading to IBM's latest mainframe computer, the z14. That product was highlighted as a growth driver for IBM's Systems business in Tuesday's statement.

But Systems revenue was pulled down by a decline in storage revenue, IBM chief financial officer James Kavanaugh said on a call with analysts following the earnings report. "It contributed to a modest shortfall to our own expectations of IBM's revenue growth in the quarter, he said.

Looking forward, Kavanaugh said the company has "all the confidence in the world" that it can get the storage business "back to where it needs to be" in the second half of the year.

IBM continues to seek growth from its strategic imperatives, which include security, mobile, analytics and cloud. In the fourth quarter that group contributed 49 percent of all revenue, and the Cantor analysts expected that balance to be unchanged in the first quarter. In fact, strategic imperatives came in below that, representing 47 percent of all IBM revenue. Big Blue had $4.2 billion in cloud revenue, up 20 percent.

Growth from the strategic imperatives category came in at 15 percent year over year, which is down sequentially from 17 percent year-over-year growth in the fourth quarter.

"The value is so much about the strategic imperatives area, and that's why I think this is a disappointment," Daniel Ives, chief strategy officer of GBH Insights, said on CNBC's "Closing Bell" on Thursday.

Altogether, IBM's biggest business segment, Technology Services and Cloud Platforms, generated $8.63 billion in revenue, above the FactSet consensus estimate of $8.28 billion, according to StreetAccount.

The Cognitive Solutions and Global Business Services groups both slightly exceeded expectations. Cognitive Solutions fetched $4.3 billion in revenue, above the $4.22 billion consensus estimate, and Global Business Services had $4.2 billion, above the $4.05 billion estimate, according to StreetAccount.

The smaller Systems and Global Financing segments both came in below expectations. The former had $1.5 billion, under the $1.72 billion estimate, while the latter had $405 million in revenue, behind the $412.2 million estimate, StreetAccount said.

The company said it had a 16 percent tax rate, excluding certain items, in the first quarter, along with an $800 million discrete tax benefit.

Stifel Financial's David Grossman asked if growth opportunities will offset any struggles that could come after the initial wave of upgrades to the latest IBM mainframes.

"We got an entire mainframe team in 170 countries around the world that are driving like crazy to deliver the value to our clients to make this a secular shift, versus cyclical," Kavanaugh said.

In the first quarter IBM announced the Cloud Private for Data software and an expansion of its partnership with Salesforce.

IBM stock is up 5.3 percent since the beginning of the year.

- CNBC's Ingrid Angulo contributed to this story.

WATCH: IBM beats the Street

IBM beats the Street
IBM beats the Street