The Cloud

IBM ‘Still Has a Revenue Growth Problem’

The computing giant recorded a 2% fall in revenue for the third quarter but boosted gross margins.
William SprouseOctober 17, 2018
IBM ‘Still Has a Revenue Growth Problem’

IBM reported earnings of $3.42 per share on revenue of $18.76 billion for the third quarter, sending its shares down as much as 7.5% Wednesday afternoon.

The company saw year-over-year revenue declines in its technology services, cloud platforms, cognitive solutions, and systems businesses. Its overall revenue was down 2%.

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Analysts had forecast earnings of $3.40 per share, and revenue of $19.10 billion.

“IBM still has a revenue growth problem,” Stifel analysts wrote in a note on Tuesday. Analysts at Nomura Instinet wrote that they expected IBM to return to revenue growth in the second half of 2019.

IBM had two consecutive quarters of revenue growth leading up to this latest report, after 23 consecutive quarters of revenue declines.

“In the quarter, we again expanded our overall operating pre-tax income margin year-to- year, and produced our strongest year-to-year gross margin performance in three years,” Chief Financial Officer James Kavanaugh stated.

“At the same time, with our strong cash generation, we increased our capital investment in the business through the first three quarters and continued to return capital to shareholders.”

IBM said its balance sheet remained strong and it was well positioned for the long term. The company had $14.7 billion in cash on hand at the end of the quarter. It had debt of $46.9 billion.

Maribel Lopez, principal analyst at Lopez Research, told MarketWatch that IBM’s cloud revenue was good but that cloud services was becoming a commodity market that commanded lower margins.

“On the cloud side, IBM did better last quarter than they were given credit for, but whether they can show continued momentum this quarter and in the coming quarters is a big unknown,” Lopez said.

IBM’s cognitive solutions segment, which produces the artificial intelligence product Watson, reported revenue of $4.1 billion, down 6% year-over-year.

“[IBM’s] ongoing challenge with legacy revenue streams was apparent and we were particularly surprised by the level of weakness in the firm’s cognitive solutions business,” wrote Andrew Lange, a Morningstar analyst.

On the earnings call, Kavanaugh attributed the poor performance of some areas of the cognitive solutions business to “secular shifts in the market.”

Photo: Getty Images

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