International Business Machines Corp. (IBM) - Get Report shares traded sharply lower Tuesday after the tech giant pulled its full-year profit guidance after posting weaker-than-expected first quarter sales.
IBM said non-GAAP earnings for the three months ending in March came in at $1.84 per share, down 18% from the same period last year but 4 cents ahead of the Street consensus forecast. Group revenues, IBM said, fell 3.4% from last year at $17.57 billion, but that figure slightly missed analysts' estimates of a $17.62 billion tally. Quarterly operating profit margins also improved by 15% to 46.2%, IBM said.
Looking through to the rest of the financial year, IBM said it will no longer hold to its 2020 earnings forecast, which had estimated non-GAAP earnings of at least $13.57 per share, but would re-assess its near-term future at the end of the current quarter.
"In the first quarter, we had modest revenue growth ... we entered the quarter in a good position with momentum from the end of last year," CEO Arvind Krishna told investors on a conference call late Monday. "However, in the last few weeks we faced a shift in client priorities, towards the preservation of capital. This impacted software disproportionately (while) other parts of our business maintained modest momentum."
"We are entering this challenging environment from a relative position of strength." he added. "Our clients are enterprises that run the most essential processes of the world (and) our balance sheet is strong."
"I believe that what we are going through today with the shift to remote work, automation, application modernization will accelerate our clients’ shift to hybrid cloud," Krishna said. "This gives me immense confidence in our future."
IBM shares were marked 5.4% lower in early trading Tuesday to change hands at $114.13 each, a move that would extend the stock's year-to-date decline to around 15%.
Revenues from IBM'S cloud and cognitive software division, one of the two new group reporting structures put in place last year, rose 5.4% to $5.24 billion, while cloud revenues alone rose 19% to $5.4 billion thanks to the 2019 acquisition of Linux maker Red Hat Inc.
"While we are intrigued by the potential changes new management may implement, we choose to wait until we see evidence that IBM can organically grow the top line," said BMO Capital Markets analyst Keith Bachman, who has a market perform rating with a $135 price target on the stock.
"Given that we project 1.5% to 2.0% revenue growth in (calendar year 2021), based on easy compares and improved global GDP, we believe that our free cash flow multiple is reasonable," he added. "Longer term, we remain skeptical that IBM's portfolio can sustain growth, given our view of longer-term headwinds with GTS and systems. "