Enterprise computing giant IBM (NYSE:IBM) reported third-quarter results this Tuesday evening.

Slowed down by currency exchange effects and a hard-to-match performance in the third quarter of the previous year, Big Blue saw revenue and net profits fall.

IBM's third-quarter results: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$18.8 billion

$19.2 billion

(2.1%)

Net income

$2.69 billion

$2.73 billion

(1.5%)

GAAP earnings per share (diluted)

$2.94

$2.92

0.7%

Data source: IBM. GAAP = generally accepted accounting principles.

What happened with IBM this quarter?

  • The stronger dollar worked to IBM's disadvantage in the third quarter, effectively explaining the entire drop in top-line revenues. On a constant currency basis, IBM's total sales held steady compared to the year-ago quarter.
  • IBM's so-called strategic imperatives -- a basket of high-growth operations built around information analysis, cloud computing, artificial intelligence, and data security -- accounted for 49.2% of the company's total revenue over the last four quarters. Within this group's 13% year-over-year sales growth, cloud computing services led the way with a 20% growth rate.
  • The latest generation of System Z mainframes launched in the third quarter of 2017, making for difficult year-over-year comparisons. The systems division saw sales falling 1.5% while operating margin contracted from 17.3% to 10.9%.
  • Bottom-line earnings were helped by IBM's generous share buyback program, which reduced the share count by 2% over the last four quarters and 0.5% in the third quarter alone.
A businessman, sitting at a bistro table with his laptop and some coffee, lifts his glasses to rub his eyes.

Image source: Getty Images.

What management had to say

In a conference call with financial analysts, CFO Jim Kavanaugh highlighted the long growth runway that lies ahead for IBM's strategic imperatives, starting from the current level of $39.5 billion in trailing sales:

While that's already a significant revenue base in the emerging high-value segments of the IT industry such as cloud and AI, it's still early in the adoption of these technologies ... it's estimated that enterprises are only 10% to 20% into their cloud journey, with progress slowed by the lack of interoperability across cloud environments, and concerns about the ability to manage data privacy and security in multiple cloud environments. And so clients need a cloud partner that can offer a hybrid cloud for workloads that cut across public, private, and traditional; a secure cloud for mission-critical workloads and highly sensitive data; and an open cloud to run complex, multicloud environments.

IBM wants to be that multiplatform cloud partner -- for many enterprise businesses in every sector, and for the long haul.

Looking ahead

Based on the third quarter's results and general business trends, IBM's management saw no reason to change full-year financial guidance targets. Management simply reaffirmed last quarter's expectations for fiscal year 2018, which were (and remain) as follows:

  • GAAP earnings should add up to at least $11.60 per diluted share, up from $6.17 per share in 2017.
  • Adjusted earnings still have a full-year baseline target of $13.80 per share, which was exactly what IBM reported for this metric last year.
  • Free cash flows are expected to land near $12 billion, down from $13 billion in the previous fiscal year.
  • To reach these targets, IBM would need to report fourth-quarter GAAP earnings of at least $4.24 per share, adjusted earnings starting at $4.84 per share, and roughly $5 billion in free cash flow.

Anders Bylund owns shares of IBM. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.