Analysts parse IBM earnings, see weakness, stock slides

After reporting results Wednesday, IBM is on track for its worst trading day since... well, the last time it reported earnings back in July, as analysts comb through the numbers and raise their collective eyebrow at a couple of different issues.

They highlighted sluggish growth in the company’s transaction processing business — where IBM software is run directly on the mainframe systems used in high-security, high-transaction industries like airlines and banking.

They also called out softness in the company’s hybrid cloud business, built around IBM’s roughly $35 billion purchase of Red Hat in 2019. Companies using the hybrid cloud can connect systems hosted on the public cloud and on-site mainframes. But the results spotlighted a slowdown in actual revenue-generating usage, or consumption, of IBM’s hybrid cloud services by clients.

Here’s some of what analysts are saying:

Bank of America: “Transaction processing declined 3% in constant currency due to customers continuing to prioritize hardware spend over software, but transaction processing should reaccelerate as we move through the mainframe cycle.”

Evercore ISI: “The big question on the print was the deceleration in Red Hat (+12%) vs. expectations for mid-teens growth.”

BMO Capital: “We thought IBM’s quarter was reasonable, including better Software growth helped by HashiCorp, a return to growth in Consulting, and solid margins/free cash flow, though Red Hat and transaction processing were disappointing, which we think could drive near-term consolidation in the shares.”

RBC Capital: “The focus remains around Red Hat which decelerated growing 14%, 12% [in constant currency] compared to 16%, 14% [constant currency] last quarter as management noted consumption headwinds.”

BNP Paribas: “Software growth of 9% [constant currency] fell short of cons. for the second straight quarter. Red Hat guidance also seemed to soften, now expected to accelerate to ‘low-end’ of mid-teens growth.”

Bernstein Research: “Red Hat deceleration appears to have been a worry driving shares down post market close, however the company showed strong bookings growth and confidence that this will help bring Red Hat back to mid-teens YoY growth. Transaction Processing was also weak due to (according to IBM) customers focusing more on mainframe IBM Z.”

Morgan Stanley: “Software growth accelerated as we previewed, but RedHat and TP — which collectively represent 53% of Software revenue — missed expectations again. Furthermore, we estimate organic Software growth in 3Q was just 5% Y/Y, below our 6% Y/Y forecast and management’s 7% target model. Lastly, for the first time in 12 quarters, gross margins missed expectations, a surprise to us.”