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IBM Shares Tumble As Q4 Revenue Slide Mars Solid Earnings Beat

IBM told investors that it sees 'sustainable' revenue growth once it sheds its legacy infrastructure division later this year, but weaker-than-expected fourth quarter sales have shares deeply in the red following last night's Q4 earnings.

International Business Machines  (IBM) - Get International Business Machines Corporation Report shares tumbled the most in ten months Friday after it posted weaker-than-expected fourth quarter revenues that marred a solid first year for the cloud-focused computer group under new CEO Arvind Krishna.

IBM posted non-GAAP earnings of $2.07 per share, down 56% from last year but topping Street forecasts of $1.79. Gross margins improved, as well, to 51.7%. Revenues, however, continued to disappoint, falling 6% from last year to $20.4 billion, even with a 19% jump in sales from RedHat, which IBM acquired in 2018, and a 10% increase in cloud revenues that lifted the overall total to a record $7.5 billion. Global Business Services (GBS) revenues fell 5%, IBM said.

IBM also told investors it expects to have 'sustainable' mid-single-digit revenue growth once it completes the spin-off of its 'managed infrastructure services unit' (MIS), a legacy division that sits within the group's global technology services group, before the end of the year. Free cash flow in 2021, IBM said, should improve to between $11 billion and $12 billion.

"In spite of the many challenges in 2020, we have made good progress. In 2021, and we believe you will see that progress showing up in our results. With that said, we know it's not necessarily going to be a straight line," CEO Krishna told investors on a conference call late Thursday.

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"The operating environment remains difficult because of what clients are experiencing at the moment. We can see that in the quarter just past. Our revenue was slightly behind typical seasonality, but we finished strong in free cash flow, which is important as it's the fuel for investments," he added. "Our performance reflects the fact that our clients continue to deal with the effects of the pandemic and broader uncertainty of the macro environment."

IBM shares were marked 10.25% lower in pre-market trading Friday to indicate an opening bell price of $118.17 each, clipping their three-month gain to around 2%. 

"While there were green shoots on our hybrid thesis (RHT momentum + GBS signings), 4Q results were a setback and a reminder there’s still meaningful work to be done on the turnaround," said Credit Suisse analyst Matthew Cabral 

"Looking ahead, we remain firm in our view that IBM’s opportunity in a hybrid-first world is meaningfully underappreciated and undervalued at these levels, with the planned spin-off of MIS easing the path to sustained growth and, ultimately, a re-rating for the stock," he added.