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IBM Declines After Soft Consulting Sales Weigh on Results

Matt Swanson, software analyst at RBC Capital Markets, joins BNN Bloomberg to discuss IBM earnings.

(Bloomberg) -- International Business Machines Corp. declined as much as 8% in late trading after the company reported underwhelming revenue in the third quarter, hurt by a slowdown in consulting demand.

Sales increased 1% to $15 billion in the period, slightly missing the average estimate from analysts. Results were weighed down by a flat consulting business, which contributed $5.15 billion in revenue.

Clients in that segment aren’t expanding budgets, and some generative AI projects are coming at the expense of traditional consulting, Chief Financial Officer Jim Kavanaugh said in an interview. They’re opting to spend cautiously due to ongoing uncertainty about economic factors like interest rates and geopolitical tensions, he added.

“Everybody knows consulting is an area which is under pressure right now,” said Anurag Rana, an analyst at Bloomberg Intelligence.

Expectations were high for IBM heading into earnings: The company’s stock climbed to an all-time record earlier this month on the back of enthusiasm about Big Blue’s software unit. The shares declined as low as $214 in extended trading on Wednesday after closing at $232.75.

In recent years, IBM has worked to transform itself from a conventional computer company into one focused on high-growth software and services. IBM has used acquisitions to expand its offerings, including a proposed takeover of Hashicorp Inc. announced in April and last year’s purchase of Apptio for $4.6 billion.

Bookings for AI consulting and software have exceeded $3 billion since mid-2023, the company said. That is up from the $2 billion IBM disclosed during its last quarterly earnings report in July. About 80% of the bookings come from consulting, with the rest from software, the company said.

Third-quarter software sales increased 9.7% to $6.5 billion, ahead of the average analyst estimate of $6.4 billion. Growth for Red Hat, a business IBM acquired five years ago, jumped to 14%. 

Infrastructure revenue was down 7% to $3.04 billion, a steeper decline than expected. Kavanaugh said IBM is toward the end of its mainframe product cycle and plans to release a new one next year.

(Updates share reaction starting in first paragraph.)

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