I IBM’s earnings don’t inspire confidence. Here’s where the weakness seems to come from.
After reporting results Wednesday, IBM was on track for its worst trading day since... well, the last time it reported earnings back in July, as analysts combed through the numbers and raised their collective eyebrows at a couple of different issues.
Here are some analysts sounding off:
BNP Paribas: “Software growth of 9% [constant currency] fell short of cons. for the second straight quarter. Red Hat guidance also seemed to soften.”
Morgan Stanley: “Software growth accelerated as we previewed, but RedHat and TP — which collectively represent 53% of Software revenue — missed expectations again. Furthermore, we estimate organic Software growth in 3Q was just 5% Y/Y, below our 6% Y/Y forecast and management’s 7% target model.”
Bank of America: “Transaction processing declined 3% in constant currency due to customers continuing to prioritize hardware spend over software, but transaction processing should reaccelerate as we move through the mainframe cycle.”
Bernstein Research: “Red Hat deceleration appears to have been a worry driving shares down post market close, however the company showed strong bookings growth and confidence that this will help bring Red Hat back to mid-teens YoY growth.”
They highlighted sluggish growth in the company’s transaction processing business — where IBM software is run directly on the mainframe systems used in high-security, high-transaction industries like airlines and banking.
The Takeaway
Analysts also called out softness in the company’s hybrid cloud business, built around IBM’s roughly $35 billion purchase of Red Hat in 2019. Companies using the hybrid cloud can connect systems hosted on the public cloud and on-site mainframes. But the results spotlighted a slowdown in actual revenue-generating usage of IBM’s hybrid cloud services by clients.
All that said, IBM managed to pare its losses through Thursday’s session as investors remembered that Big Blue’s results had some green shoots, too.