Weak performance in consulting and infrastructure businesses in the third quarter, IBM plunged 8% after hours | Financial Report Insights
However, IBM's software business revenue increased by 10% year-on-year, marking the largest year-on-year growth in three years, mainly due to expanding cloud infrastructure to support the increasing demand for generative AI. The scale of generative AI business has exceeded $3 billion, an increase of $1 billion from the second quarter
After IBM announced its financial report after Wednesday's market close, it showed that the company's third-quarter revenue fell short of analysts' expectations, mainly due to the sluggish consulting business, causing the company's stock price to drop by 8% after hours. However, the company stated that its cognitive AI business has exceeded $3 billion in scale, an increase of $1 billion from the second quarter.
Key Financial Data:
Revenue: The third-quarter revenue was $14.97 billion, a year-on-year increase of 1.5%, falling short of analysts' expected $15.07 billion.
Net Loss: The third-quarter net loss was $330 million, with a loss of 36 cents per share. In the same period last year, there was a net profit of $1.7 billion. The loss was mainly due to a one-time expense of about $2.7 billion related to the transfer of part of the pension plan obligations to third-party insurance companies.
Adjusted Earnings Per Share: $2.30, lower than analysts' expected $2.23.
Segment Data:
Software Business: Revenue of $6.52 billion, a year-on-year increase of about 10%, higher than analysts' expected $6.37 billion. IBM's Red Hat business, acquired five years ago, grew by 14%. The cognitive AI business scale exceeded $3 billion, an increase of $1 billion from the second quarter.
Consulting Business: Revenue of $5.15 billion, a decrease of 0.5%, slightly lower than analysts' expected $5.19 billion.
Infrastructure Department: Revenue of $3.04 billion, a decrease of 7%, lower than analysts' expected $3.24 billion.
According to the financial report, about 20% of IBM's business comes from software solutions. With the company expanding its cloud infrastructure to support the continuous demand for cognitive AI technology, it achieved the largest quarterly revenue growth in three years. Additionally, the software department's gross margin is 83%, the highest among all business departments.
IBM's AI business portfolio— including various product bookings and actual sales— grew to $3 billion in the third quarter, an increase of $1 billion from the second quarter. IBM's CFO Jim Kavanaugh stated in a media interview:
"We are quite confident in the growth trajectory of our AI business."
Despite growth in software and AI-related businesses, 80% of IBM's revenue comes from consulting services, and consulting revenue in the third quarter slightly declined. Kavanaugh mentioned in a media interview that the consulting department still faces the same uncertain economic environment as its competitors, with clients not expanding budgets in this area, and some spending on cognitive AI projects coming at the expense of traditional consulting. He added that temporary challenges arise from economic factors such as interest rates, inflation, geopolitical tensions, and demographic changes, which are reasons why clients are cautious about spending.
"Factors such as interest rates, inflation, geopolitical tensions, and demographic changes have brought temporary challenges."
Furthermore, IBM's infrastructure department saw a 7% decline in sales, with overall revenue slightly below analysts' expectations. The company expects this situation to continue over the next few quarters as it is at the end of a three-year product cycle. However, Kavanaugh mentioned that IBM's next-generation hardware is expected to be launched in the first half of 2025, which is anticipated to boost earnings at that time In recent years, IBM has been committed to transforming from a traditional computer company to a company focused on high-growth software and services. Through acquisitions, IBM continues to expand its product line, including the proposed acquisition of Hashicorp announced in April this year, and the $4.6 billion acquisition of Apptio last year.
This quarter, IBM announced the expansion of its Oracle product consulting network and acquired the Oracle service company Accelalpha. In addition, IBM also completed the sale of QRadar cloud software assets to Palo Alto Networks and acquired StreamSets and webMethods from Software AG.
For the fourth quarter, management expects revenue growth on a constant currency basis to be in line with the third quarter. Revenue in the third quarter increased by 2% on a constant currency basis.
IBM's stock price closed up 0.22% on Wednesday at $232.75. Due to poor performance in the consulting and infrastructure divisions, IBM's stock price fell 8% in after-hours trading, before narrowing to a 3.2% decline. Excluding the impact of after-hours trading, IBM's stock price has risen by about 43% year-to-date, while the S&P 500 index has risen by about 21% during the same period.
