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IBM's Q3 Earnings Beat, Stock Down on Weak Revenue Growth

International Business Machines (IBM) Q3 results reflect steady adoption of the company's hybrid cloud business.

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This story originally appeared on Zacks

International Business Machines Corporation IBM reported third-quarter 2021 non-GAAP earnings of $2.52 per share, which surpassed the Zacks Consensus Estimate by 1.2% but decreased 2.3% on a year-over-year basis.



Revenues of $17.6 billion missed the Zacks Consensus Estimate by 0.8%. The top line improved 0.3% (as reported) on a year-over-year basis driven by steady demand for the company’s hybrid cloud business. Adjusting for currency and divested businesses, revenues declined 0.2% year over year.



Revenues from services signings increased 3% (at constant currency or cc) to $5 billion in the third quarter.



Following the year-over-year decline in third-quarter earnings and muted revenue growth, shares of IBM dropped as much as 5% in extended trading on Oct 20.



Shares of IBM are up 12.7% compared with the Zacks Computer - Integrated Systems industry’s growth of 16.6% in the year-to-date period.

- Zacks

Year to Date Performance

Zacks Investment ResearchImage Source: Zacks Investment Research

Red Hat Acquisition Aids Top Line

Revenues from Red Hat in the third quarter increased 17% at cc and on a normalized basis, driven by the strong uptake of Red Hat Enterprise Linux and OpenShift platform. Currently, more than 3,500 clients are using Red Hat and IBM’s hybrid cloud platform.



The buyout helped IBM to enhance containerized software capabilities and accelerate service engagement.



In the third quarter, Red Hat introduced a re-architected version of the Red Hat Ansible Automation platform. Red Hat also launched a new version of its Advanced Cluster Management for Kubernetes. These two products are now more tightly integrated, which helps drive hybrid cloud automation.



In addition, the latest version of Red Hat OpenShift became generally available in the reported quarter.



IBM is also leveraging OpenShift container platform to enable clients to upscale business operations, in a secure manner, via AI-powered Cloud Paks.



Additionally, the digital transformation wave has bolstered the adoption of cloud-based QRadar, Identity and Trust services as well as CloudPak for Security offerings.

Geographic Revenue Details

Revenues from Americas remained flat year over year at $8.2 billion. Revenues from Europe, Middle-East and Africa were $5.6 billion, down 1% year over year. Revenues from Asia-Pacific totaled $3.8 billion, which remained flat on a year-over-year basis.

Cloud & Cognitive Software Segment

Cloud & Cognitive Software segment’s revenues-external improved 2.5% year over year (up 1.9% at cc) to $5.7 billion. Further, cloud revenues (external) rose 20% to $2.1 billion. The upside can be attributed to synergies from the Red Hat acquisition as well as growth in cloud, Data & AI, security and IoT solutions.



Revenues in the Cloud and Data platforms increased 10% year over year (up 9% at cc) to $3 billion. The platform is gaining from Red Hat’s acquisition synergies and traction in Cloud Paks suite.



Revenues from the Cognitive Applications remained flat year over year (down 1% at cc) at $1.3 billion. Revenues from the Transaction Processing Platforms, which includes software that runs mission-critical workloads, declined 9% on a year-over-year basis to $1.3 billion.

Global Business Services Segment

Revenues in the Global Business Services (GBS) external segment totaled $4.4 billion, which improved 11.6% (up 11% at cc) from the year-ago quarter.



Global Process Services revenues improved 19% year over year at cc to $0.3 billion. Application Management revenues improved 5% at cc to $1.8 billion, while Consulting revenues increased 16% at cc to $2.3 billion.



Segmental revenues pertaining to cloud advanced 37% at cc from the prior-year quarter’s reported figure to $2 billion.

Global Technology Services Segment

Revenues from Technology Services-external declined 4.8% (down 5.4% at cc) from the year-ago quarter’s level to $6.2 billion.



Segmental revenues pertaining to cloud remained flat year over year at $2.4 billion.



Infrastructure & Cloud Services and Technical Support Services revenues declined 6% (at cc) and 5% (at cc) year over year to $4.7 billion and $1.5 billion, respectively.

Systems Revenues

Systems revenues-external decreased 11.9% (down 12.4% at cc) on a year-over-year basis to $1.1 billion.



Systems Hardware revenues decreased 14% (at cc) year over year to $0.8 billion. Operating Systems Software declined 8% (at cc) year over year to $0.3 billion.



IBM Z revenues declined 33% year over year. Power revenues declined 25% from the year-ago quarter’s levels. Storage revenues increased 11% year over year.



Segmental revenues pertaining to cloud decreased 43% at cc from the prior-year quarter’s reported figure to $0.3 billion.



Finally, Global Financing (includes financing and used equipment sales) revenues-external fell 19.2% year over year (down 19.8% at cc) to $220 million.

Operating Details

Non-GAAP gross margin contracted100 basis points (bps) year over year and came in at 48%.



Non-GAAP research, development & engineering (R, D&E) expenses increased 6.9% year over year to $1.62 billion.



Non-GAAP selling, general and administration (SG&A) expenses increased 0.7% year over year to $4.39 billion.



Non-GAAP pre-tax income margin from continuing operations was 13.6% compared with the year-ago period’s 14.7%.

Balance Sheet & Cash Flow Details

As of Sep 30, 2021, IBM had $8.4 billion in total cash and marketable securities compared with $8.16 billion as of Jun 30, 2021.



Debt, including Global Financing debt of $15.9 billion, totaled $54.5 billion, down $7.0 billion since the end of 2020, and down $18.5 billion since closing the Red Hat acquisition.



The company reported cash flow from operations of $2.7 billion during the third quarter compared with $2.6 billion ($1.7 billion when excluding Global Financing receivables) in the second quarter of 2021.



IBM generated free cash flow of $0.6 billion in the third quarter compared with $1 billion in second-quarter 2021.



Moreover, the company returned $1.5 billion to shareholders in the third quarter through dividends.

Guidance

For 2021, IBM refrained from providing any formal guidance. The company expects to exit the fourth quarter in a position to deliver a mid-term model of mid-single digit revenue growth and cumulative free cash flow of $35 billion between 2022 and 2024.



During the fourth quarter, the company intends to complete the separation of Kyndryl, which is on track for Nov 3.

Zacks Rank & Stocks to Consider

IBM currently carries a Zacks Rank #4 (Sell).



Some better-ranked stocks in the broader technology sector are Advanced Micro Devices, Inc. AMD, Amphenol Corporation APH and ASGN Incorporated ASGN, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



Advanced Micro Devices is scheduled to report on Oct 26 while Amphenol and ASGN Incorporated are set to release quarterly earnings on Oct 27.



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