IBM falls after revenue misses

  • IBM's previous trend of declining revenue is back.
  • The company did notch new cloud deals in the quarter.
Virginia Rometty
Jodi Gralnick | CNBC
Virginia Rometty

IBM stock fell as much as 5 percent on Tuesday after the company reported mixed earnings for its fiscal third quarter.

Here's how the company performed:

  • Earnings: $3.42 per share, excluding certain items, vs. $3.40 per share as expected by analysts, according to Refinitiv.
  • Revenue: $18.76 billion, vs. $19.10 billion as expected by analysts, according to Refinitiv.

The company's overall revenue came in 2 percent lower year over year, according to a statement.

Analysts were expecting IBM's revenue to drop for the quarter, which ended on Sept. 30. The company sustained five years of revenue declines before reversing the trend by showing revenue growth for three consecutive quarters.

IBM's biggest business segment, Technology Services and Cloud Platforms, hit $8.3 billion in revenue, which was down 2 percent year over year. Analysts had expected $8.43 billion in revenue from the group, according to FactSet.

The Cognitive Solutions business segment produced $4.1 billion in revenue, down 6 percent and below the $4.3 billion estimate, while Global Business Services delivered revenue of $4.1 billion, up 1 percent and above the $4.06 billion FactSet estimate.

IBM's Systems business had $1.7 billion in revenue, up 1 percent and below the $1.79 billion estimate.

"IBM still has a revenue growth problem," Stifel analysts wrote in a Tuesday note. While the company saw some expansion in recent quarters from the introduction of a new mainframe computer, the fresh cycle will turn into a headwind in the short term, the analysts wrote.

Analysts at Nomura Instinet expect IBM to return to revenue growth in the second half of 2019, according to a note published on Friday.

IBM reiterated its previous guidance of at least $13.80 in earnings per share, excluding certain items, in the full fiscal year; analysts were expecting $13.80 in earnings per share for that period, according to Refinitiv.

"The fourth quarter, seasonally, has a large transaction base," IBM chief financial officer James Kavanaugh said during a conference call with analysts after the earnings release.

But next quarter IBM will face hard comparisons with its mainframe business given the refresh, Kavanaugh said.

Cloud is one of IBM's four key strategic imperatives, or growth drivers -- the others are social, mobile and analytics -- and in the quarter, IBM announced cloud deals with Economical Insurance, ExxonMobil and Novis.

In the past year IBM said it captured $19 billion in cloud revenue, up 20 percent, and nearly $11 billion of that figure was delivered as a service. IBM's cloud infrastructure business -- which is one part of its as-a-service portfolio -- is smaller than competing offers from Amazon and Microsoft. Kavanaugh insisted that IBM has "a differentiated value proposition," including support for multiple clouds.

IBM stock is down 5 percent since the beginning of the year.