IBM (IBM, Financial) experienced a stock decline of 6% after its Q3 earnings report. The company reported a notable earnings per share (EPS) increase but saw only a 1.5% year-over-year revenue growth, reaching $14.97 billion, which fell short of expectations. Despite this, IBM reaffirmed its FY24 free cash flow guidance of "above $12 billion" and anticipates Q4 constant currency (CC) revenue to be consistent with Q3.
- Software Segment: Revenue surged 9.7% (9.6% CC) to $6.5 billion, driven by a 14% growth in Red Hat and strong transaction processing. Software now comprises nearly 45% of total revenue, up from the high 20s in 2018. Recurring revenue, about 80% of annual Software revenue, continues robust growth. Annual recurring revenue (ARR) for hybrid platform and solutions reached $14.9 billion, up 11% year-over-year. This quarter marks the 5-year anniversary of the Red Hat acquisition, which has doubled in size since.
- Consulting Segment: Revenue dipped 0.5% year-over-year (0.2% CC) to $5.2 billion, aligning with the lower end of internal expectations. While technology spending remains strong, discretionary spending pauses due to macroeconomic uncertainties, such as geopolitical issues and inflation, impact the Consulting unit. Clients are reprioritizing IT budgets to prepare for generative AI.
- Infrastructure Segment: Sales declined 7.0% (6.7% CC) to $3.0 billion, influenced by product cycle dynamics. Hybrid infrastructure fell 9%, with IBM Z revenue down 19% in the 10th quarter of z16 availability. Despite this, the z16 program has delivered revenue growth in 8 of the last 10 quarters. Distributed Infrastructure revenue decreased by 3% due to product cycle impacts on the Power business.
- IBM is transitioning its portfolio towards higher growth and margins, positioning well for 2025. Software revenue growth has accelerated and is expected to continue in Q4, with Red Hat leading in mid-teens growth. Q4 Consulting revenue is expected to mirror Q3 performance.
The stock's decline comes despite EPS upside and strong Software segment performance. The Infrastructure segment's weakness was anticipated, given the prolonged z16 cycle. Macro pressures and a pause in discretionary spending from Consulting clients are likely contributing to the stock's pullback.
The stock had risen 40% since early June, reaching new all-time highs as investors focused on IBM's AI potential. High sentiment before the earnings report may have prompted profit-taking.
