IBM shares rose more than 5% to $264.27 in after-hours trading on October 21 after the company reported third-quarter results that exceeded Wall Street expectations. The market response was notably stronger than after IBM's previous earnings release, when the stock suffered a sharp sell-off. Investors focused on adjusted earnings, revenue and the pace of growth in the software business.
Adjusted earnings reach $2.95 per share
For the quarter ended in September, IBM reported adjusted earnings of $2.95 per share, up 11% from a year earlier and above the $2.85 average analyst estimate compiled by FactSet. Revenue rose 5% year over year to $17.1 billion, exceeding expectations of $16.82 billion.
The simultaneous beat on earnings and revenue indicates that cloud computing, software and related technology services supported the quarter's performance. For investors, the size of the beat and IBM's ability to sustain revenue growth remain important factors in assessing the company's valuation and the stock's subsequent performance.
Software revenue grows 8%
Revenue from IBM's software business increased 8% year over year to $7.8 billion, ahead of the 6.3% growth analysts had expected. Software growth outpaced the company's overall revenue growth and was a key contributor to the quarter's results, underscoring continued market attention on demand for IBM's enterprise software and related services.
Chief Executive Arvind Krishna said in a company news release that disciplined execution throughout the quarter had accelerated revenue growth and produced strong free cash flow. By highlighting revenue growth alongside cash generation, management signaled that investors should also focus on operating efficiency and the company's ability to convert business activity into cash.
Shares have not fully recovered from the summer decline
Despite the after-hours gain following the third-quarter report, IBM shares had not fully recovered from their summer decline before the results were released. On July 14, when the company issued preliminary second-quarter results, both earnings and revenue came in below expectations. The stock fell 25% that day, its largest one-day decline in company history.
IBM attributed the earlier performance to shifts related to its business mix or changes in demand, but the information available at the time did not clarify the scope of those changes. The latest results, with revenue, adjusted earnings per share and software sales all above expectations, have temporarily improved the market's view of IBM's near-term operating performance. Investors will continue to monitor whether software growth can be sustained in coming quarters and whether free cash flow remains at its current level.