What happened
Shares of International Business Machines (IBM 1.05%) fell on Wednesday after the company reported mixed third-quarter results. While earnings rose and beat analyst estimates, revenue dipped and came in below expectations. The stock was down about 6% at 12:15 a.m. EDT.
So what
IBM reported third-quarter revenue of $18.8 billion, down 2% year over year and $330 million below the average analyst estimate. Surprisingly, the revenue decline wasn't due to the mainframe business, which is at the tail end of the current product cycle. Mainframe revenue rose 6% year over year, on top of 62% growth in the prior-year period.
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Instead, a strengthening U.S. dollar reduced IBM's growth rate. On a currency-adjusted basis, revenue was flat in the third quarter.
Non-GAAP earnings per share came in at $3.42, up 5% year over year and $0.02 better than analysts were expecting. The earnings growth was driven by a pre-tax margin improvement, a discrete tax benefit, and share buybacks, and it was partly offset by lower revenue. Overall gross margin was flat on a year-over-year basis, the best gross-margin performance in three years.
Now what
IBM reiterated its full-year guidance, which calls for non-GAAP earnings per share of at least $13.80 and free cash flow around $12 billion. The mainframe business will almost certainly become a headwind in the fourth quarter, so returning to revenue growth will be tough.
This revenue decline broke IBM's three-quarter streak of revenue growth, and the market is clearly not happy. But earnings are on the rise and margins are stabilizing, both signs that the company's turnaround is making progress.
