International Business Machines Corporation (NYSE:IBM) delivered stronger-than-expected third-quarter earnings on Thursday, but its shares tumbled more than 7% in premarket trading as investors focused on a more cautious revenue outlook and signs of slowing growth in its cloud unit.
The company posted adjusted earnings per share of $2.65, exceeding analyst expectations of $2.44. Revenue reached $16.33 billion, ahead of estimates of $16.09 billion and up 9% year over year, or 7% at constant currency.
Despite this solid quarterly performance, IBM shares fell sharply after the company projected constant currency revenue growth of “more than 5%” for the full year — implying a slowdown from the 7% growth recorded this quarter. The company also raised its full-year free cash flow guidance to approximately $14 billion.
Investors were also wary of a slowdown in cloud momentum. Revenue at the hybrid cloud business — anchored by Red Hat — grew 14% during the quarter, down from 16% in the previous period.
“This quarter we accelerated performance across all of our segments, and again exceeded expectations for revenue, profit and free cash flow,” said Arvind Krishna, IBM chairman, president and chief executive officer. “Clients globally continue to leverage our technology and domain expertise to drive productivity in their operations and deliver real business value with AI.”
Segment breakdown
Software led the way with a 10% revenue increase to $7.2 billion. Infrastructure jumped 17% to $3.6 billion, helped by a 61% surge in IBM Z systems. Consulting grew a more modest 3% to $5.3 billion.
“New innovation, the strength and diversity of our portfolio, and our disciplined execution led to acceleration in revenue growth and profit in the quarter,” said James Kavanaugh, IBM senior vice president and chief financial officer.
The company’s AI book of business now stands at over $9.5 billion, underscoring its strategic push into artificial intelligence. Adjusted gross profit margin improved to 58.7%, up 1.2 percentage points year over year.
IBM generated $3.1 billion in net cash from operating activities in the quarter and returned $1.6 billion to shareholders via dividends.
Market reaction
Commenting on the results, Stifel analysts said the “software reset likely weighs on the stock near-term,” though they view the company’s longer-term position as more stable.
“Fundamentally, business remains solid and we reiterate our Buy; however, defensive-minded investors may experience some short-term softness,” they noted.