International Business Machines Corp. (IBM - Get Report) shares fell sharply Wednesday after the technology giant posted weaker-than-expected third quarter revenues as cloud computer deliveries slowed and a stronger U.S. dollar weighed on international sales, complicating the uneven turnaround engineered by CEO Ginni Rometty.
IBM said sales for the three months ending in September fell 2.1% from the same period last year to $18.8 billion, missing Street forecasts of $19.1 billion as cloud sales grew at around half the rate of the previous quarter. Earnings were solid, at $3.42 per share, but slowing sales in IBM's systems division, where revenue slowed sharply from the previous quarter and cognitive software sales -- which include its Watson brand -- fell 6% to $4.15 billion. Technology Services & Cloud Platforms saw revenues fall 2% to $8.3 billion.
"Obviously, we've still got a lot of work to do," CFO Jim Kavanaugh told investors on a conference call late Tuesday following the results. "We're 16 days into a very important fourth quarter and we are focused on delivering consistent operational performance to deliver value for our clients in the marketplace and also for our shareholders.
"Our clients value our incumbency," he added. "They value it because we understand their infrastructure, their workloads, and they trust us to move them to the future. When you look at our outsourcing backlog, we were hovering around 25% of a $90 billion outsourcing backlog (at the beginning of the year). But right now, exiting third quarter, that $90 billion backlog give or take, we are now in about 32%, 35% cloud content. So, we are winning in the marketplace and our clients are choosing us to move down to the future."
IBM shares were marked 6.5% lower at the opening bell and changing hands at $135.73 each, a move that extends its year-to-date decline to around 12% and values the Armonk, New York-based group at just under $130 billion. Further downward pressure may come from Morgan Stanley, which cut its IBM price target early Wednesday to $168 from $185.
The U.S. dollar index, which tracks the greenback against a basket of six global currency peers, rose 0.7% over the three months ending in September and 1.33% against the European single currency.
IBM's gross margin for the September quarter was 49.5%, essentially flat on a year-to-year basis and the best figure the group has posted in three years, according to CFO Kavanaugh, and held to its full-year non-GAAP earnings guidance of $13.80 per share on free cash flow generation of around $12 billion.
"You combine that margin with our continued enterprise productivity, and you see that we're able to deliver strong operating pretax margins, and you couple that with our strong free cash flow which on a trailing 12 months is still in excess of $12 billion and free cash flow realization over 100%," Kavanaugh told investors. "And that gives us confidence to reaffirm our expectation of at least $13.80."