Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

IBM Reports Messy Results

By Timothy Green - Oct 16, 2019 at 5:44PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Revenue declined, as only a portion of Red Hat's revenue could be recognized.

International Business Machines ( IBM 0.07% ) reported its third-quarter results after the market closed on Wednesday. Revenue came up short of expectations, although there was a lot of noise involving currency, divestitures, and the accounting treatment of the Red Hat acquisition.

Earnings edged out analyst estimates, and the company reiterated its guidance for the full year. On a normalized basis, revenue from Red Hat grew by 20% year over year, an acceleration from its time as a stand-alone company. But weak mainframe sales in the lead-up to the new z15 system and a slump in sales for the global technology services segment hurt the company's results.

The headline numbers


Q3 2019

Change (YOY)

Compared to Average Analyst Estimate 


$18.0 billion


Missed by $190 million

Non-GAAP earnings per share



Beat by $0.02

Data source: IBM. YOY = year over year. GAAP = generally accepted accounting principles.

IBM's third-quarter results were complicated by Red Hat. The company was able to record just $371 million in revenue from Red Hat during the quarter, significantly less than the $987 million the software company would have reported if it hadn't been acquired. Most of the difference is due to purchase accounting and the elimination of sales between IBM and Red Hat.

Currency and divestitures were also an issue. Excluding both, but including the partial Red Hat revenue, IBM's revenue would have declined by just 0.6% year over year. Cloud revenue rose 14% year over year, adjusted for currency and divestitures, to $5.0 billion.

Here's how IBM's segments performed during the quarter:



Change (YOY, Adjusted for Currency and Divestitures)

Cloud and cognitive software (includes Red Hat)

$5.3 billion


Global business services

$4.1 billion


Global technology services

$6.7 billion



$1.5 billion



$0.3 billion


Data source: IBM. YOY = year over year.

The global technology services segment suffered from weaker-than-expected client business volumes, but signings grew by 20%, and cloud signings jumped 60%. The systems segment was down thanks to a 20% decline in mainframe sales. IBM began shipping its new z15 mainframe system in the last week of the quarter, so mainframe revenue should spike in the fourth quarter.

Debt and guidance

IBM used debt to finance the acquisition of Red Hat, and it's now prioritizing paying down that debt. The company has suspended share buybacks for the time being so that debt repayment takes center stage. Since the end of the second quarter, IBM has reduced its total debt by close to $7 billion. IBM's core debt, which excludes debt tied to its financing business, now sits at $43 billion, down about $5 billion.

IBM's Global Center for Watson IoT in Munich, Germany.

Image source: IBM.

IBM kept its full-year earnings and free cash flow guidance the same. The company expects non-GAAP EPS of at least $12.80, a number that includes certain Red Hat acquisition-related expenses. Free cash flow is expected to be around $12 billion.

IBM will be able to recognize an increasing proportion of Red Hat's revenue in future quarters as these transaction-related adjustments run their course. And starting in the fourth quarter, the company will get a revenue boost from the z15 mainframe. IBM should be able to grow revenue in 2020, even with continued currency headwinds, thanks to Red Hat and the mainframe business.

Whether that revenue growth is sustainable this time around remains to be seen.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
$121.67 (0.07%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/08/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.