IBM Stock Dips 6% After Q3 Earnings Despite Revenue Beat

Shares of International Business Machines Co (IBM) fell more than 6% in after-hours trading on Wednesday following the company’s third-quarter earnings report. Despite reporting strong overall revenue and earnings that surpassed analyst expectations, modest growth in its software division raised concerns among investors.

IBM announced software revenues of $7.2 billion for the quarter ending September 30, 2023, aligning with the FactSet analyst consensus. The growth within the software segment showed mixed results: hybrid-cloud revenue, which includes contributions from Red Hat, increased by 14%, while automation revenue surged 24%. In contrast, data revenue grew 8%, and transaction processing saw a decline of 1%.

Investors and analysts had closely monitored IBM’s software performance, particularly as the third quarter is typically a “seasonally weak” period. Following the earnings release, Evercore ISI analyst Amit Daryanani flagged concerns regarding Red Hat’s slowing growth. Revenue from Red Hat increased by 12% on a constant-currency basis, down from 14% in the previous quarter. Jefferies analyst Brent Thill emphasized that IBM’s software growth momentum in upcoming quarters would significantly depend on Red Hat, acquired by the company in 2019. Thill referred to Red Hat as “a cornerstone of IBM’s software growth strategy,” with management expressing confidence in sustaining mid-teens growth rates.

Despite the stock dip, IBM’s overall financial performance showed positive trends. Total revenue for the September quarter reached $16.3 billion, marking a 9% increase from the same period last year and surpassing the FactSet consensus estimate of $16.1 billion. Adjusted earnings were reported at $2.65 per share, exceeding expectations by 20 cents. CEO Arvind Krishna noted the company’s “accelerated performance across all segments,” and highlighted that IBM’s AI business is now valued at more than $9.5 billion.

Looking ahead, IBM remains optimistic about its full-year outlook. The company projects revenue growth of over 5% in constant currency and free cash flow of $14 billion, surpassing Wall Street’s estimate of $13.6 billion.

Analysts had anticipated a strong quarter driven by increasing demand for AI technology and strategic partnerships. Wedbush analyst Dan Ives expected solid performance linked to IBM’s more than 70 AI workflows across various sectors, including sales, finance, and marketing. Ives also pointed to synergies from Red Hat and HashiCorp acquisitions, suggesting these factors would contribute additional growth in the future. He remarked that IBM is well-positioned to benefit from rising global investments across both organic and inorganic sectors, underlining the company’s ability to innovate rapidly in the hybrid cloud and AI markets.

As IBM navigates this complex landscape, investor sentiment remains cautious, hinging on the performance of its software division and the pivotal role of Red Hat in future growth strategies.