IBM Common Stock (NYSE:IBM): Soft Q1 Results Rattles Investors, Triggers Sell-off

IBM Q1 Results

Big Blue reported earnings per share of $2.45 a share slightly above estimates of $2.42 a share. Revenue came in at $19.07 billion also beating Wall Street expectations of $18.83 billion and representing a 5% year over year growth.

The adjusted gross margin in the quarter fell 70 basis points annually to 43.7%. It also decreased 30 basis points to 44.1% on the tech giant backing out restructuring costs for System’s hardware segment.  Both metrics were below the 45.1% consensus estimate.

Investors Concern

A point of concern among investors has to do with the fact that the company’s earnings received a boost from a one-time tax gain of $817 million. Chief Financial Officer, James Kavanaugh, reiterating that investors should not count on a continued boost from mainframe sales to boost earnings, also went a long way in spooking the markets, triggering the sell-off.

“As we enter the second half, we have a significant headwind on mix because we are not counting on more than a typical mainframe cycle.  It would not be prudent for analysts to predict or to predicate our $13.80 [2018] guidance on breaking mainframe cycle,” said Mr. Kavanaugh.

IBMs earnings were much softer than what its peers have been reporting raising further concerns whether the company is experiencing slow growth. A number of enterprise tech firms have posted strong earnings reports as IT spend continues to rise.

Focus On Strategic Businesses

However, IBM wants investors to pay attention and judge the company based on its efforts in what it calls strategic imperatives that accounted for 47% of its total revenue. This segment comprises of cloud-computing, analytics, mobile, and security business. The division also includes software analytics and the highly touted artificial intelligence platform, Watson

However, it appears the strategic businesses are not growing as fast as they ought to. The crucial businesses grew by 15% in the quarter, in line with estimates, even though analysts were expecting modest beat given that IBM future depends on them

Watson which is the first commercially available AI platform that can process vast amounts of big data and interact in natural language has started to live up to expectation be it at a slow pace. In the first quarter, it was a major contributing factor, helping drive double-digit growth.

Investors have not been forgiving of IBM in the market in part because the stock sat out a massive 2-year tech rally.  The stock has consistently traded sideways, as others hit higher highs.  Warren Buffett through his investment firm, Berkshire Hathaway Inc. (Class B NYSE:BRK.B), offloading nearly all of his shares in the company has also gone a long way in denting the stock’s outlook on Wall Street.