International Business Machines (IBM) shares fell early Thursday as the company's third-quarter earnings exceeded Wall Street expectations, while revenue fell short amid declines in the technology giant's consulting and infrastructure segments. Per-share adjusted earnings came in at $2.30 for the September quarter, up from $2.20 the year prior, signaling some resilience in earnings performance.
The consensus on Capital IQ was for normalized EPS of $2.23, indicating that IBM outperformed profitability expectations. Although revenue ticked up 1% year over year to $14.97 billion, this figure missed the market's forecast of $15.08 billion. Chief Executive Arvind Krishna highlighted during an earnings call that despite mixed overall revenue performance, the company is actively repositioning its portfolio towards a focus on higher growth and higher margin businesses that cater to client needs in hybrid cloud and artificial intelligence.
Following these announcements, shares experienced a decline of 4.7% in premarket trading. The software segment demonstrated notable progress, with revenue climbing 9.7% to $6.52 billion, benefiting from a 10% increase in hybrid platform and solutions sales and a 9% uptick in transaction processing.
Chief Financial Officer James Kavanaugh remarked, "Our investments are paying off in software as we've repositioned our portfolio in recent years... Software now accounts for nearly 45% of our total revenue." Conversely, consulting revenue encountered a slight slip of 0.5% to $5.15 billion as the division faced pressures from a "dynamic market environment," which led clients to reprioritize their IT budgets in preparation for advancements in generative artificial intelligence.
Furthermore, sales in the infrastructure business decreased by 7% to $3.04 billion, impacted by reduced demand in hybrid infrastructure and infrastructure support categories. Despite these challenges, Kavanaugh expressed optimism regarding future growth opportunities, stating, "Despite the weak current demand environment, we are well positioned to capture growth from generative AI.
We continue to build a solid generative AI book of business with about $1 billion of new bookings in the quarter." Looking ahead, IBM anticipates that revenue growth in the ongoing quarter will remain consistent with that of the third quarter on a constant-currency basis. However, foreign exchange fluctuations are expected to present a half-point headwind to revenue growth in the fourth quarter.
The company forecasts low double-digit revenue growth for the software segment in the current quarter and projects consulting revenue to be "similar" to the previous quarter. For the full year 2024, IBM maintains confidence in its ability to generate free cash flow exceeding $12 billion, primarily driven by growth in adjusted earnings before interest, taxes, depreciation, and amortization.
Kavanaugh stated that actions taken in the third quarter have accelerated productivity initiatives, leading the company to believe it can achieve approximately $3.5 billion in annual run rate savings by the end of 2024, an increase from prior estimates of $3 billion. Price: 219.65, Change: -13.10, Percent Change: -5.63.