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International Business Machines zips past 2Q estimates, but draws mixed analyst reactions

Last updated: 08:02 19 Jul 2018 EDT, First published: 16:32 18 Jul 2018 EDT

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Analysts were cautious about the narrowing of IBM's adjusted profit margins to 46.5% in the quarter

Shares in International Business Machines Corp (NYSE:IBM) are gaining ground in pre-market trading, a day after posting second-quarter results that surpassed Wall Street’s estimates thanks to revenue from its cloud computing, analytics and cybersecurity businesses.

IBM shares shot up nearly 2.5% before the opening bell to US$148.00 in response to its results.

The results pleased investors, but analysts were far more skeptical.

Analysts call results "mixed"

Analysts were especially concerned about the narrowing of IBM’s adjusted profit margins to 46.5% in the quarter.

Oppenheimer analysts Ittai Kidron and Vinod Srinivasaraghavan called the results mixed as revenue growth accelerated in the quarter while the pressure on IBM’s gross margin remained.

“We do not view the results as a reason to become more constructive on shares,” the analysts wrote in a note to investors. “To change our view, IBM must drive consistent revenue growth across key strategic areas while demonstrating margin expansion (or at least stability),” they added.

Moshe Katri of Wedbush is similarly cautious about IBM. He maintains a Neutral stance on the stock as he thinks IBM’s growth in revenue, profitability and returns are still being impacted by the cannibalization of IBM’s legacy-based services and products.

“We could become more constructive on the stock if/when management takes more aggressive restructuring actions which we believe could unlock shareholder value,” wrote Katri in a note to investors. Katri’s price target on the stock is US$185.00.

A detailed look at the numbers

Excluding items, IBM earned US$3.08 per share on revenue of US$20bn. Analysts expected earnings per share of US$3.04 on revenue of US$19.88bn.

IBM, which made its name by providing mainframes, is expanding its business from traditional computers to artificial intelligence, big data, mobile, cloud computing and analytics.

“More clients are engaging IBM on their journey to the cloud, and deploying IBM Cloud, Watson AI, analytics, blockchain and security solutions,” said Ginni Rometty, IBM’s CEO, in a statement.

Its efforts are showing signs of paying off as revenue from its strategic imperatives segment, which covers its investments in cloud, analytics, mobile, social and security technologies jumped 15% to US$39bn over the last year.

Looking further at the details, revenue from its cloud business in the quarter saw an 18% rise to US$4.7bn. This climb was largely owed to the sale of hardware, software and services that allow for the implementation of hybrid cloud solutions across an array of platforms.

This quarter marks IBM's third straight quarter of revenue growth, according to published reports.

The company projects that its full-year earnings guidance will come to US$13.80 per share, which is slightly ahead of the market’s estimate of US$13.78 per share.

IBM ended the second quarter with US$11.9bn of cash to hand while its debt came to US$45.5bn.

Contact Ellen Kelleher at ellen@proactiveinvestors.com

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