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International Business Machines (IBM) - Get Free Report shares traded sharply lower Thursday after the group posted disappointing third quarter earnings in the first full update to include its $34 billion acquisition of Linux-maker Red Hat.

IBM said non-GAAP earnings for the three months ending in September came in at $2.68 per share, down 21.6% from the same period last year but a penny ahead of the Street consensus forecast. Group revenues, IBM said, fell 3.9% to $18 billion, missing analysts' forecasts of an $18.29 billion tally. 

IBM's cloud and cognitive software unit, the division in which it placed Red Hat, saw revenues rise 6.4% to $5.28 billion, while IBM's IBM's cloud services revenues rose 11% to $5 billion. Global technology services, IBM's biggest division, saw revenues fall 5.6% to $6.7 billion.

"In the third quarter, the in-quarter revenue did not come in as expected we had lower customer business volumes in certain markets and some multi-national clients versus our expectations. And this impacted the growth rate by an additional point," CFO James Kavanaugh told investors on a conference call late Wednesday. "Because this work leverages existing resources, it has a higher margin profile. And so these lower volumes impacted our gross margin, which was down about a point from the prior year."

"We're very pleased with Red Hat overall," he added. "And I guess I would conclude most importantly, the confidence in the workforce, in IBM and Red Hat."

IBM shares were falling 6.19% to $133.31 in trading Thursday.

Looking into the final months of 2019, IBM said it sees full-year non-GAAP earnings of around $12.80 per share, a figure that matches its updated guidance from early August, and maintained its free cash flow forecast of around $12 billion.

"IBM reported an underwhelming quarter missing top-line estimates and narrowly beating consensus EPS in its first earnings print including Red Hat," said KeyBanc Capital Markets analyst Arvind Ramnani, who has a sector weight rating on the stock with a $142 price target. "We think the integration benefits are still in the conceptual phase and have yet to show up in a meaningful financial manner due to a number of underlying cross-currents."

"Overall, IBM remains upbeat on the Red Hat acquisition, but in our view investors must remain patient until further evidence of the financial benefits comes to fruition," he added.