Summary
- Company misses on top line despite Red Hat benefit.
- Full year forecast for EPS was not raised.
- Perhaps a change at the top would spark shares.
It was just last week that I detailed how technology and service giant IBM (IBM) had a chance to show the market its future was here. With the Red Hat deal having closed in July, investors were looking forward to a better revenue picture moving forward. That optimism was somewhat tempered by a lower than expected profit forecast, so I thought IBM management had a chance at the Q3 earnings report to redeem itself. Unfortunately, the company whiffed again on the top line, showing its biggest problem in recent years remains.
After the bell on Wednesday, the company reported its Q3 results. For the period, total revenues were just over $18 billion. That was a 3.9% decline, but the company noted that revenues only were down 0.6% when adjusting for currencies and divested businesses. That headline in the earnings release only adjusted for the negatives, not the addition of Red Hat which would be truly apples to apples. Anyone that followed the market knows the dollar was strong in Q3, so that part of the scenario wasn't exactly a surprise.
The overall top line number missed the average street estimate for $18.22 billion, which itself was down about $100 million in the last six months. The company said that $371 million was added to the top line from the Red Hat purchase. However, not only was the overall number reported a nearly $200 million miss, but the company also missed revenue expectations for each of its key business segments:
- Cloud and cognitive software: $5.28 billion actual, estimate $5.41 billion.
- Global business services: $4.117 billion actual, estimate $4.12 billion.
- Global technology services: $6.700 billion actual, estimate $6.78 billion.
- Systems: $1.481 billion actual, estimate $1.52 billion.
Now Q3 was expected to be the final revenue decline in the short term, primarily thanks to Red Hat helping out more as we move along, along with easier comparisons to year ago periods. However, since the street estimate for Q4 was for just 1.2% revenue growth going into today, the full percentage point miss in Q3 will likely bring down street estimates close to the flat line. The only good news is that the dollar has weakened a little during October, which would help the situation a bit if it continues.
On the bottom line, non-GAAP EPS of $2.68 came in a penny above estimates. Considering that the company basically always beats, this wasn't exactly a tremendous result, and of course last year's period saw a profit of $3.42 a share. Management maintained its full year guidance of at least $12.80 in operating earnings, meaning the disappointing forecast given in August remains. The current guidance represents a dollar per share decline over 2018, and while some progress is expected next year, the suspension of the buyback program does add a headwind moving forward.
