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IBM's stock falls as Q3 revenue declines despite Red Hat purchase, cloud growth

International Business Machines Corp.'s shares were down by more than 7% in after-market trading Oct. 16 after the company reported a decline in revenue for the fifth consecutive quarter.

Despite contributions from Red Hat Inc., the open source software firm IBM acquired in July for about $34 billion, the tech giant's third-quarter revenue was down 3.9% year over year to $18.03 billion, compared to $18.76 billion in the prior-year period. Systems revenue declined 14.7% to $1.48 billion, and global financing revenue was down 11.7% to $343 million. Global technology services, IBM's biggest segment by revenue, reported a sales decline of 6.7% year over year to $6.70 billion, compared to $7.10 billion in the prior-year quarter.

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IBM's mainframe computers
Source: IBM

Speaking during an Oct. 16 earnings conference call, IBM CFO James Kavanaugh attributed the decline in global technology service revenues to a mix of lower revenue from client business volumes in certain markets as well as company execution issues.

"From a credibility perspective, we've got to execute better there," Kavanaugh said. "We've been focusing this business on margin, profit and cash. It is a high-fixed cost, high capital-intensive business, and we've got to deliver that right return to our investors."

The CFO said IBM is well positioned to revitalize the global technology services business in the future, noting a 20% increase in sales signings in the third quarter and the last 12 months, driven by the company's cloud business. The cloud and cognitive software segment, which now includes Red Hat, saw revenue growth of 6.4% year over year to $5.28 billion. Red Hat's revenue grew 20% on a normalized basis in the third quarter, compared to its last quarter as an independent company.

"IBM's performance continues to be led by areas that help our clients with our digital transformations and journeys to cloud," Kavanaugh said. "Red Hat is in the center of this."

Factoring in the impact of the Red Hat acquisition, IBM's third quarter GAAP net income totaled $1.67 billion, or $1.87 per share, down from $2.69 billion, or $2.94 per share, a year ago. On a non-GAAP basis, third-quarter net income totaled about $2.40 billion, or $2.68 per share. The S&P Global Market Intelligence consensus EPS estimate for the quarter was $2.22 on a GAAP basis and $2.66 on a normalized basis.

Looking ahead, IBM expects full-year GAAP EPS of at least $10.58 and non-GAAP EPS of at least $12.80.