IBM Shares Surge After Cloud-Driven Q2 Earnings Beat Under New CEO Krishna

IBM enjoyed a rare top line beat late Monday as cloud revenues surged 30% from last year to $6.3 billion, helping new CEO Arvind Krishna post stronger-than-expected second quarter earnings.

International Business Machines  (IBM) - Get Report shares surged higher Tuesday after the cloud-focused tech group posted stronger-than-expected second quarter earnings under new CEO Arvind Krishna.

IBM said adjusted operating earnings for the three months ending in June fell 31.2% from last year to $2.18 per share, but beat the Street consensus forecast by more than 10 cents. Group revenues were also lower than last year, down 5.5% at $18.1 billion, but were again ahead of analysts' estimates thanks in part to a 30% pop in cloud revenues -- to $6.3 billion -- and a firm tally from its cloud and cognitive software division, one of the two new group reporting structures put in place last year.

Free cash flow generation also impressed, growing 15% year-on-year and snapping several quarters of decline under the previous executive team, while margins and cash collections improved.

IBM didn't provide near-term earnings guidance -- after pulling its full-year forecast on April 21 -- "given the uncertainty in the environment and consistent with our direction from last quarter," according to CFO Jim Kavanaugh.

"Needless to say, this is a unique and challenging time for our clients. To continue to be their most trusted partner, we are spending a lot of time and energy to drastically simplify how our teams go to market," said CEO Krishna, who took over from the departing Ginni Rometty earlier this year, during a conference call with investors late Monday. "We are doing a lot of work on the back-end to bring our portfolio together in a more cohesive fashion, so our teams can come with simpler and more relevant proposals."

"We are also focused on changing our culture and operating model, so we can make decisions more quickly and make our interactions with clients a lot more experiential," he added. "Moving forward, we will continue to take actions that improve our operating model and accelerate our strategic priorities so that we can emerge stronger."

IBM shares were marked 3% higher in early trading Tuesday to change hands at $130.03 each, the highest since early March  and a move that would trim the stock's year-to-date decline to around 1%. 

"We don’t think IBM’s quarter will sway investors to switch positions, either positive or negative. IBM revenues were modestly higher than our estimates but comfortably above consensus," said BMO Capital Markets analyst Keith Bachman, who carries a market perform rating with a $140 price target for the stock. 

"Free cash flow margin was solid at 15.9%. However, organic growth ex Red Hat, divestitures and FX declined by about 7% y/y, and less excluding mainframes, which we do not consider a durable source of growth," he added. "We choose to stay on the sidelines until we have confidence that IBM can sustain positive organic rev growth."