IBM Reduces Guidance In Q3 Financial Report Amid Transformation To Cloud Era

IBM edged above analysts' expectations, slightly missed its own revenue target, and for the most part throughout Monday's third-quarter earnings call delivered to investors a familiar script imploring patience during its strategic transformation to offering higher-margin, higher-value services.

IBM CFO Martin Schroeter said progress executing the transformation into the cloud era hit some headwinds in third quarter, leading the company to reduce its earnings guidance.

But the overall plan remains sound and IBM needs time to play the long game, according to the CFO.

IBM will continue investing where it sees higher value in the long term, expecting to further expand margins as the strategy plays out, he said.

[Related: IBM's Q2 Earnings Highlight Ongoing Transformation]

"This is how we transform from one era to the next," Schroeter told investors.

IBM shares fell 3.7 percent after hours on the financial results.

Schroeter didn't mention, and wasn't asked, about Dell's planned purchase of EMC and how the new entity could reshape the competitive landscape across the server, storage and data center markets so critical to IBM's success.

What success Schroeter could point to came in cloud, analytics, social, mobile and security -- a set of businesses that saw combined revenue growth of 20 percent in the third quarter.

Cloud revenue -- both in private cloud infrastructure and in services -- surged by 65 percent through the first three fiscal quarters, (50 percent year-over-year growth in the third quarter) pulling in $9.4 billion over the last 12 months.

The SoftLayer public cloud grew at strong double digits in the quarter and IBM's mobile business quadrupled, he said.

Overall revenue for the quarter was $19.3 billion, a 1 percent downtick that Schroeter also attributed to the Armonk, N.Y.-based company's shift to higher-value products.

Some of the weakness resulted from the storage business, Schroeter said.

But while there's obvious pressures on the "high-end spinning disk environment" that won't change anytime soon, IBM sees opportunities in its storage line once the decline stabilizes, according to the CFO.

To return to growth, the company needs to move even faster toward flash systems and its software-defined storage platform, he said.

"Storage is part of the cloud and the future of cloud," Schroeter said.

But in light of the company's overall financial metrics, Schroeter said it was prudent to update guidance to $14.75 to $15.75 per share -- down from the previous range of $15.75 to $16.50.

So far this year, IBM has acquired seven companies -- two in the quarter -- that extend its cloud capabilities. That spending will be reflected in the fourth-quarter financials, he said.

The transformation IBM is undertaking is complicated on many levels, making progress difficult to neatly predict, Schroeter told investors. When IBM looks at its major new deals, "we see the elements are to bring them into the cloud," he said.

But customers are asking for help in deploying hybrid environments, requiring IBM to invest in as-a-service elements while maintaining strong hardware and software infrastructure capabilities for standing up private clouds.

That hybrid model involves "not just technical but business elements that add complexity to the environment," Schroeter said. "The reality is not every one of those discussions aligns really well with a 90-day reporting period."

Investors should see beyond the choppy financials that stem from such a process, he said.

"Put it all together, and the progress we're making demonstrates we're on the right strategy as we help our clients move their business to the future," he said.

PUBLISHED OCT. 19, 2015