What happened
Shares of International Business Machines (IBM 0.16%) were down on Thursday after the tech giant reported mixed third-quarter results. Weakness in the large global technology services segment contributed to a revenue miss, and the accounting aftermath of the Red Hat acquisition muddled the picture. IBM stock was down 6% at 12 p.m. EDT.
So what
IBM reported third-quarter revenue of $18.0 billion, down 3.9% year over year and $190 million below the average analyst estimate. This number includes only a portion of Red Hat's revenue due to accounting rules surrounding the acquisition. Adjusted for currency and divestitures, IBM's revenue was down just 0.6%.
Image source: IBM.
The global technology services business was a weak spot, with currency-adjusted revenue slumping 4.1% year over year. Systems revenue was also down, driven by the timing of the mainframe cycle. IBM began shipping the new z15 mainframe in the final week of the quarter, so mainframe sales should soar in the fourth quarter.
Non-GAAP (adjusted) earnings per share came in at $2.68, down 22% year over year but $0.02 higher than analysts were expecting. Acquisition-related costs dragged down the bottom line.
Now what
IBM maintained its guidance for the full year, still calling for adjusted earnings per share of at least $12.80 and free cash flow of $12 billion. As time goes on, IBM will be able to recognize a greater portion of Red Hat's revenue, positioning the company for growth in 2020.
Only time will tell whether the $34 billion acquisition of Red Hat will pay off for IBM. The cross-selling opportunities are immense, and combining the two companies has strengthened IBM's hand in the cloud computing market. But the high price and the associated debt loaded onto IBM's balance sheet certainly raise the risk level.
