IBM Falls Despite Q3 Earnings Beat, Revenues Lag, View Soft

Shares of International Business Machines Corp.IBM dropped 4.84% in after-hours trading yesterday. The company reported soft third quarter 2015 results with non-GAAP earnings of $3.34 per share, beating the Zacks Consensus Estimate by a penny but declining 9.2% on a year-over-year basis.

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Revenues of $19.28 billion fell short of the Zacks Consensus Estimate of $19.64 billion while declining about 13.9% on a year-over-year basis. The company reported decline across all its segments, except cloud, analytics and engagement businesses, which showed improvement.

Segment Details

Global Technology Services (GTS) revenues declined 10.2% year over year to $7.9 billion. Adjusting for the divestment of the System x business and the impact of currency translations, segment revenues improved 1% year over year.

Global Business Services revenues declined 13.1% to $4.2 billion

IBM's services backlog at the end of the quarter stood at $118 billion, up 1% on a constant currency basis.

Revenues from the Software segment were $5.1 billion, down 10% from the year-ago quarter. Revenues from IBM's key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were down 7% from the year-ago quarter to $3.4 billion. Operating systems revenues declined 14% from the prior-year quarter to $0.4 billion.

Systems Hardware segment revenues were down 38.7% on a year-over-year basis to $1.5 billion. Revenues from System z mainframe server products increased 15% on a year-over-year basis. Revenues from System Storage went down 19% year over year. Power Systems declined 3% year over year.

Global Financing revenues declined 8.1% on a year-over-year basis to $447 million.

The company's strategic initiatives (cloud, analytics and engagement) revenues increased 17% on a year-over-year basis. The growth was 27% adjusting for currency and the divested System x business. IBM's cloud revenues jumped 45% in the year-to-date timeframe while Business Analytics revenues increased 9% in the same time period. Revenues from mobile, security and social increased about 300%, 6% and 32% respectively.

Geographic Revenue Details

Region-wise, revenues from the Americas, Europe/Middle East/Africa and Asia-Pacific declined 10%, 16% and 19% to $9.1 billion, $6.1 billion and $4.1 billion, respectively. Revenues from BRIC countries decreased 30% on a year-over-year basis.


Non-GAAP gross margin increased 80 basis points (bps) to 50% from the year-ago quarter. Total non-GAAP operating expense & other income decreased 11.5% year over year to $5.7 billion. Non-GAAP net income decreased 10.9% year over year to $3.3 million.

Balance Sheet & Cash Flow Details

IBM ended the quarter with $9.6 billion in total cash and marketable securities, compared with $8.5 billion on Dec 31, 2014. Total debt was $32.1 billion compared with $35.1 billion as of Dec 31, 2014.

IBM reported cash flow from operations (excluding Global Financing receivables) of $4.3 billion compared with $3.5 billion in the year-ago quarter. IBM generated free cash flow (excluding Global Financing receivables) of $2.6 billion, up from $2.2 billion in the year-ago quarter.

In the reported quarter, IBM returned $2.8 billion to shareholders - $1.3 billion as dividends and $1.5 billion through share repurchases.


For 2015, the company continues to expect non-GAAP earnings in the range of $14.75 to $15.75 per share (down from the earlier projection of $15.75 to $16.50), excluding charges of $1.50 per share for amortization of purchased intangible assets, acquisition-related charges and retirement-related charges. In addition, free cash flow is expected to remain flat in 2015.

Our Take

We believe that revenues are likely to be affected in the near term as the company is currently transitioning to higher-growth markets that are not yielding enough to offset declines in traditional segments.

Also, intensifying competition in the industry is a major headwind. Further, sluggish IT spending particularly on on-premise and data center hardware along with foreign exchange volatility remain added concerns.

Nevertheless, IBM's growth initiatives, including its Big Data & business analytics, cloud computing, mobile and social business are expected to drive growth. Also, the company is expected to benefit from its ongoing innovation and its array of interesting patents.

IBM has a Zacks Rank #3 (Hold). Better-ranked stocks in the broader tech space that can be considered include Pandora Media, Inc. P , MeetMe, Inc. MEET and IZEA, Inc. IZEA . All three stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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