Financial Performance

IBM Beats Q1 Estimates But Stock Dives 5.7%

“In a nutshell, patience is wearing thin on the Street around the IBM turnaround story, which continues to be elusive,” one analyst says.
Matthew HellerApril 18, 2018

IBM delivered a second straight quarter of higher revenue but a slowdown in the growth of its “strategic imperatives” segment fueled investor doubts over its turnaround strategy.

For the first quarter, the company reported adjusted earnings per share of $2.45 a share on revenue of $19.07 billion, beating estimates of $2.42 a share on revenue of $18.83 billion.

Revenue rose 5% from the year-ago period on continued strong sales of IBM’s new mainframe computer, the z14. Systems revenue, which includes the z14, was up 8% to $1.5 billion.

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“In the first quarter, we maintained momentum in our business, with reported revenue growth in total and across our major segments,” CEO Ginni Rometty said in a news release.

But IBM stock fell 5.7% in extended trading Tuesday after CFO James Kavanaugh told analysts on an earnings call that they could not expect mainframe sales to keep up into the second half of this year.

“As we enter the second half, we have a significant headwind on mix because we are not counting on more than a typical mainframe cycle,” he said.

In addition, growth from IBM’s “strategic imperatives” category — which includes emerging cloud, security, and data analytics businesses — came in at 15% year over year, down sequentially from 17% year-over-year growth in the fourth quarter.

“The value is so much about the strategic imperatives area, and that’s why I think [the first-quarter report] is a disappointment,” Daniel Ives, chief strategy officer of GBH Insights, told CNBC.

Bernstein Research analyst Toni Sacconaghi wrote in an earnings preview that he believed much of IBM’s first-quarter growth in its strategic imperatives was driven by its mainframe business.

“The upshot is that when IBM laps on the mainframe cycle in second half 2018, we could see headwinds to strategic imperatives growth,” he warned.

For the full year, IBM reaffirmed its previous earnings guidance of at least $13.80 per share, excluding items, below analysts’ expectations of $13.83 per share. “In a nutshell, patience is wearing thin on the Street around the IBM turnaround story, which continues to be elusive,” Ives wrote in a client note.