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IBM Shares Slide On Muted Outlook Following Solid Q3 Earnings

IBM, which signaled one of the biggest changes in its 109 year history earlier this month, posted solid cloud revenue gains in Q3, but sees uncertain demand levels between now and the end of the year.

International Business Machines  (IBM) - Get International Business Machines Corporation Report shares slumped lower Tuesday after the iconic computing group declined to provide a current-quarter sales forecast following Street-beating third quarter earnings after the close of trading last night.

IBM posted non-GAAP earnings of $2.58 per share, down 3.7% from last year but matching Street forecasts, on better-than-expected revenues of $17.6 billion, on the back of a near 20% gain in cloud sales, which topped the $6 billion mark and were supported by the group's 2018 acquisition of RedHat. 

However, IBM said it isn't ready to provide a near-term forecast for sales or earnings, given the global uncertainty linked to the coronavirus pandemic, and noted a $2.3 billion charge its likely to book over the final three months of the year linked to the planned sale of its its 'managed infrastructure services unit', a legacy division that sits within the group's global technology services group, which was announced earlier this month.

"Clients' near-term priorities continue to include operational stability, flexibility, and cash preservation, which tends to favor opex over capex. This is resulting in some project delays and purchase deferrals, which we see in perpetual software licenses and project-oriented and volume-based services," CFO Jim Kavanaugh told investors on a conference call late Monday. "In the near term, the rate and pace of recovery remains uncertain, and as a consequence, we have not seen a fundamental shift in overall demand levels."

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"Given this uncertainty and consistent with our direction for most of this year, we are not going to provide guidance," he added. "But I will remind you, from a historical perspective, the fourth quarter seasonally is our strongest quarter in terms of revenue and operating earnings per share due to our high-value software and hardware transactions."

IBM shares were marked 5.4% lower in early trading Tuesday to change hands at $118.79 each, a move that erases all of the stock's gains over the past six months. 

"We believe that IBM is taking the right steps to create long-term shareholder value by spinning managed services and buying Red Hat," said BMO Capital Markets analyst Keith Bachman. "Unfortunately, we think the underlying business trends remain weak such that patience will be required, particularly since the spin is a year away."

"Further, we think IBM will have limited capital to execute meaningful M&A until 2022," he added. "While we are encouraged by new managements’ bold steps, we choose to remain Market Perform on the stock given our view of no near-term catalysts, with a $138 target price."