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IBM Stock Slumps After Q3 Revenue Miss As Legacy Computer Services Business Drags

Solid gains in IBM's cloud unit were clouded by another disappointing quarter for its legacy business, which the group plans to spin-off later this year.

IBM  (IBM) - Get International Business Machines (IBM) Report shares slumped lower Thursday after another earnings report was marred by softer-than-expected revenues ahead of the planned separation of its legacy infrastructure business.

The move, first make public in October of last year, will help concentrate IBM's focus on hybrid cloud growth, the company said, which have been driving group earnings under new CEO Arvind Krishna. 

The group, which IBM named 'Kyndryl', will be lead by former global markets head Martin Schroeter and is expected to be fully separated by December 1.

"We took structural actions to improve the profit profile. The management team is in place. Employee transfers and the vast majority of client contract innovations are complete. We are now even more certain that separating this business creates value through focus," Krishna told investors on a conference call late Wednesday. "The separation is just one of the many actions we are taking to focus our business on hybrid cloud and AI and improve our financial profile."

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IBM shares were marked 7% lower in early trading Thursday to change hands at $132.05 each, a move that would trim its year-to-date gain to around 5%. 

IBM said non-GAAP earnings for the three months ending in September fell 2.3% to $2.52 per share, while revenues nudged 0.3% higher to $17.62 billion, a figure that fell shy of the Street consensus forecast of $17.72 billion. 

Global business services was the bright spot, with revenues rising 11.6% to $4.43 billion, while cloud and cognitive software revenues rose 2.5% to $5.69 billion. Global Technology Services, where the legacy busines

"Following a positive analyst day in early October, 3Q results were a setback as it underscores “core” IBM’s need to earn its post-spin multiple," said Credit Suisse analyst Matthew Cabral, who lowered his price target on the group by $4, to $172 per share, following last night's earnings. He carries an 'outperform' rating on the stock.  

"That said, we liked the GBS + Red Hat momentum and continue to believe IBM’s opportunity in a hybrid-first world is meaningfully underappreciated and undervalued at these levels; execution remains key."