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IBM Shares Fall Despite Higher-Than-Expected Sales

October 18, 2016, 5:17 AM UTC
**COMMERCIAL IMAGE** In this photo distributed by Feature Photo Service for IBM: February 16, 2016 - In Orlando, FL at the IBM PartnerWorld Leadership Conference, IBM Chairman and CEO Ginni Rometty addressed more than 1,500 IBM Business Partners from 78 countries. IBM announced a redesign of its Business Partner program with a roadmap for driving business growth and education for the cognitive era. (Sophie Elgort/Feature Photo Service for IBM)
Photograph by Sophie Elgort/Feature Photo Service for IBM—AP

International Business Machines posted better-than-expected third-quarter revenue on Tuesday, helped by growth in the company’s cloud and analytics businesses.

Under Chief Executive Ginni Rometty, the technology services company has shifted toward more profitable areas, such as cloud services, artificial intelligence, analytics, and security while trimming its traditional hardware and services businesses.

Revenue from those areas, which the company calls “strategic imperatives,” rose 16% to $8 billion in the third quarter. Cloud revenue jumped 44% compared with a 30% rise in the second quarter, it said.

However, shares of IBM (IBM), which reported its 18th straight quarter of declining revenue, were down 3.1% at $150.60 in after-market trading.

IBM has made a string of acquisitions focused on elements of its strategic imperatives business, including The Weather Company and Truven Health, spending $5.45 billion so far this year. In comparison, the company spent $821 million on acquisitions in the same period last year.

IBM’s operating gross margin fell 2.1 percentage points to 48% in the quarter, as a result of higher investments in the company’s cloud business and the shift to a subscription-based as-a-service model.

“We’re building cloud data centers which don’t come online at 90% utilization, you build utilization as you ramp,” said IBM Chief Financial Officer Martin Schroeter in an interview with Reuters.

Schroeter added that IBM would continue its pace of investments due to demand for the company’s as-a-service offerings.

“Gross margins declined 210 basis points and that was due to – probably – product mix and a higher level of overall investment for some new higher-margin products,” said David Holt, an analyst at CFRA Research.

The Armonk, New York-based company maintained its full-year adjusted earnings forecast of at least $13.50 per share.

The company’s revenue marginally fell to $19.23 billion in the quarter ended Sept. 30 from $19.28 billion a year earlier, but beat the average analyst estimate of $19 billion, according to Thomson Reuters.

Net income fell to $2.85 billion, or $2.98 per share, from $2.95 billion, or $3.01 per share.

Excluding items, IBM earned $3.29 per share, beating analysts’ average estimate of $3.23 per share.

Up to Monday’s close, the Dow Jones industrials component’s shares had risen nearly 12.5% so far this year, outperforming the 3.8% gain in the broader index.

This story has been updated.