International Business Machines Corp. reported third-quarter revenue that beat analysts’ forecasts, driven by gains in its cloud offerings, an area the company will focus on exclusively after spinning off legacy business units.
The company, which had pulled its full-year forecast in April citing uncertainty from the coronavirus pandemic, declined to provide any specific guidance on Monday, sending shares down about 2.8% in extended trading.
Earlier this month IBM announced plans to shed its division that manages corporate computer systems and go all-in on internet-based services and artificial intelligence to help revive fortunes at the 109-year-old company.
After two years of declining or flat revenue, IBM is hiving off the unit that handles day-to-day infrastructure service operations and accounts for about a quarter of the company’s total sales. But that business has shrunk in recent years as customers have moved more of their operations to the cloud, where IBM competes with rivals such as Microsoft Corp and Amazon.com Inc.
Meanwhile, demand for cloud computing services has boomed as companies have shifted to remote work.
Chief executive officer Arvind Krishna took over from Ginni Rometty in April and has moved quickly to cut thousands of jobs as many of IBM’s customers have pared investments and held off on big software deals during the pandemic.
The splitting off of the services unit, which won’t be completed until next year, will let the company target hybrid-cloud software and services.
In 2018, IBM spent $34 billion to buy Red Hat to further those efforts. Hybrid cloud refers to companies using a combination of their own servers and renting storage and computing power from large providers such as Amazon and Microsoft.
“As we look forward, the case for hybrid cloud is clear,” Krishna said on a conference call with analysts. “It’s a tremendous opportunity valued at $1 trillion with most of the enterprise opportunity ahead of us.”
Sales fell 2.6% to $17.6 billion for the three months ending Sept. 30, the Armonk, New York-based company said Monday in a statement. That was slightly better than the $17.5 billion analysts had forecast, on average.
The revenue decline was driven by tech support units Global Business Services and Global Technology Services, where the business that will be spun off is housed, which reported decreases of 4.7% and 3.6%, respectively.
Meanwhile total cloud revenue increased 19% to $6.0 billion, led by Red Hat, which saw a 17% bump in sales. IBM released preliminary results earlier this month when it announced the spinoff.
“This is one of the last quarters where IBM’s lagging legacy infrastructure business will drag down performance, as those operations will be spun out to NewCo in 2021, with IBM instead focusing its attention and investment behind cloud and AI, its strongest performing areas,” said Nucleus Research analyst Daniel Elman, in a note before the results were released.
Chief Financial Officer Jim Kavanaugh said the pandemic’s affects on the economy continue to damp demand.
“The rate and pace of recovery remains uncertain and as a consequence, we have not seen a fundamental shift in overall demand levels,” he said on the call, adding that IBM has “healthy pipelines in cloud and data platforms” in the current quarter.
Third-quarter earnings excluding some costs were $2.58 a share, beating the average analyst estimate of $2.55. Shares closed little changed at $125.52 Monday in New York and have declined 6.4% this year, compared with a 6% gain in the S&P 500 Index.