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IBM Shares Drop on Weaker-Than-Expected Quarterly Revenue

Stefani Reynolds | Bloomberg | Getty Images
  • IBM's revenue was up slightly as its top two business segments fell short of estimates.
  • After removing the Kyndryl business IBM will spin out next month, revenue at IBM rose 2.5%, which is approaching CEO Arvind Krishna's target of mid-single-digit growth.

IBM shares fell as much as 5% in extended trading on Wednesday after the company issued third-quarter results, including lower revenue than analysts had expected.

Here's how the company did:

  • Earnings: $2.52 per share, adjusted, vs. $2.50 per share as expected by analysts, according to Refinitiv.
  • Revenue: $17.62 billion, vs. $17.77 billion as expected by analysts, according to Refinitiv.

The enterprise hardware maker and consulting provider's revenue increased slightly from a year earlier, according to a statement. Revenue grew 3% in the prior quarter. Net income declined 33% as the company's gross margin narrowed to 46.4% from 48% in the previous quarter.

The results "fell short of our expectations," IBM CEO Arvind Krishna told analysts on a conference call.

IBM expects to spin out the managed infrastructure part of Global Technology Services, under the name Kyndryl, in early November. When excluding the Kyndryl portion of the business, revenue was up 2.5%. That's approaching Krishna's stated goal of mid-single-digit revenue growth in the medium term.

The global services segment, which contains managed services, outsourcing and support, contributed $6.15 billion in revenue. That was down about 5% from a year earlier and below the $6.25 billion consensus among analysts polled by StreetAccount.

Some customers held off on starting projects in the quarter, with the Kyndryl deal coming up, Krishna said.

In 2022 IBM will refine compensation for salespeople, which should improve performance, "because the only way that they will get anywhere near the target incentives is to make their software number," Krishna said.

The Cloud & Cognitive Software business, including Red Hat, produced $5.69 billion in revenue, up 2.5% and less than the StreetAccount consensus of $5.77 billion.

Revenue in IBM's global consulting unit rose about 12% to $4.43 billion in revenue, beating the $4.29 billion StreetAccount consensus.

Systems revenue, including hardware, was $1.11 billion, which down almost 12% and below the $1.23 billion consensus.

"With a competitive labor market, this is putting some pressure on our labor costs, including higher acquisition and retention costs, which is not yet reflected in our current pricing," said Jim Kavanaugh, IBM's finance chief. "We expect to capture this value in future engagements, but it will take time to appear in our margin profile."

The company did not provide guidance.

Prior to the report, shares of IBM were up about 13% this year year, trailing the S&P 500's 21% gain.

During the period, IBM released details on an artificial-intelligence processor and announced plans to buy hybrid cloud consulting companies BoxBoat Technologies and Bluetab Solutions Group.

WATCH: IBM CEO discusses Red Hat growth and its role in the company's hybrid cloud strategy

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