IBM Earnings Were Fine in the Last Quarter Before Its Kyndryl Spinoff. The Stock Is Falling.
IBM is seeking to become a growth story again.
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IBM stock is falling as investors digest its last earnings report before the spinout of its Kyndryl managed IT services arm in early November.
Results for the third quarter were largely in line with Street estimates, though revenue was on the weak side. IBM (ticker: IBM) reported revenue of $17.6 billion, up 0.3%, a little below the Wall Street analyst consensus forecast of $17.8 billion. Adjusted for currency and divested businesses, revenue was up 0.2%.
IBM stock was down 4.7% in premarket trading Thursday.
IBM said revenue was up 2.5% excluding Kyndryl, or 1.9% higher adjusted for currency and divested businesses. Profits on a non-GAAP basis were $2.52 a share, two pennies above the consensus call. The company didn’t provide any more detail on how the quarter would have looked adjusted for the Kyndryl transaction, which will close Nov. 3.
In an interview with Barron’s, IBM CFO Jim Kavanaugh said the slight shortfall in quarterly revenue relative to Street expectations reflects some softness in the systems business, where the company will launch a new mainframe product cycle in the 2022 first half, as well as customer hesitation ahead of the company’s recent disclosure of details on the Kyndryl spinoff. The CFO noted that IBM expects growth from what will be a newly constructed infrastructure reporting segment—it will include mainframes—in 2022.
Part of the logic behind the spinout is to turn IBM into a growth story again. As part of that process, the company is making a big push to build up its cloud business, and on that score, it is showing some progress. The company said total cloud revenue over the last 12 months was $27.8 billion, up 14%.
IBM said revenue from its Global Business Services unit in the latest quarter was $4.4 billion, up 11.6%, and slightly above the Street consensus for $4.3 billion, driven by 17% growth in consulting and 19% growth in its business process outsourcing operation.
Cloud and Cognitive Software revenue was $5.7 billion, up 2.5%, and a smidgen below the consensus call of $5.8 billion. That includes 10% growth in “cloud and platforms,” flat revenue from “cognitive applications,” and a 9% drop in revenue from transaction processing. Revenue from the Red Hat business was up 17%.
Global Technology Services revenue, most of which will be reassigned to Kyndryl going forward, was $6.2 billion, down 4.8%. CFO Kavanaugh told Barron’s that Kyndryl’s revenues will consist primarily of about 75% of the current revenues from Global Technology Services.
Systems revenue, including hardware, was $1.1 billion, down 11.9%. The Global Financing segment’s revenue was $220 million, down 19.2%.
“With the separation of Kyndryl early next month, IBM takes the next step in our evolution as a platform-centric hybrid cloud and AI company,” IBM Chairman and CEO Arvind Krishna said in a statement. “We continue to make progress in our software and consulting businesses, which represent our higher growth opportunities. With our increased focus and agility to better serve clients, we are confident in achieving our medium-term objectives of mid-single-digit revenue growth and strong free cash flow generation.”
In Wednesday’s regular session, IBM shares were down a few pennies at $141.94.
Write to Eric J. Savitz at [email protected]
