Big Blue back on the attack, analysts cautious

By Supantha Mukherjee and Sonam Rai

REUTERS - IBM's shares surged 8 percent on Wednesday after the world's first big computing company beat expectations on third-quarter revenue and gave an outlook that hinted it was back on a growth track after six years in retreat.

There was no initial sign of changes to major brokerage trading recommendations for International Business Machines Inc and most shied away from calling a complete turnaround in the company's fortunes.

But the results pushed Big Blue shares to a high of $158.52 in early trading in its biggest intraday percentage gain since 2009, in stark contrast with a nearly 12 percent fall so far this year.

 

"We were pleased to see the quality of IBM's earnings improve, with IP income and taxes being less of a driver of upside than in prior quarters," Deutsche Bank analyst Sherri Scribner wrote in a note.

While IBM has struggled more than peers such as Oracle Corp and Microsoft Corp to adjust their approach to a changing market, the quarterly performance of its software business was noteworthy given its presence in key software markets, Jefferies analyst John DiFucci wrote in a note.

IBM's revenue has fallen for 22 straight quarters as weak demand from customers left its legacy hardware and software businesses stagnating.

The results showed revenue from IBM's cloud, cybersecurity and data analytics business rose 11 percent to $8.8 billion in the quarter, accounting for about 46 percent of total revenue.

The company's software revenue also grew for the first time after 13 consecutive quarters of declines.

"We see the business as secularly challenged due to its high exposure to a legacy business model, and see continued margin pressure over the long-term as IBM's business is pressured by competition from lower-cost offerings and the cloud," Deutsche Bank analyst Sherri Scribner wrote in a note.

But she added: "We are modestly adjusting our FY-17E EPS higher on a lower share count and some additional mainframe sales."

Out of 25 analysts covering the stock, only 6 have a "buy" or higher rating, 15 are on "hold", and 4 have a "sell" or lower. They have a median price target of $154.50.

"The bottom line, IBM remains in a "work-in-progress" mode, as its continues to convert its revenue base away from asset/labor intensive legacy into asset/labor light "digital" solutions," Wedbush analyst Moshe Katri said.

(Reporting by Supantha Mukherjee and Sonam Rai in Bengaluru; editing by Patrick Graham)