IBM Beats a Lowered Bar in Third Quarter, but Shares Slip Premarket
IBM reported adjusted earnings of $2.95 per share for the quarter ended September, up 11% from a year earlier and above the $2.85 analysts had expected. Investors.com reported that revenue also beat estimates. Diluted earnings per share from continuing operations came to $2.31, according to the company's release. Shares nonetheless traded down 6% in Thursday premarket trading, per Seeking Alpha.
Adjusted figures strip out items a company chooses to exclude from its own measure of profit. The gap between $2.95 adjusted and $2.31 diluted is therefore a question for the reconciliation table in the release, which walks from one number to the other. The headline figures do not answer it. Anyone comparing IBM's results with a sell-side model, meaning the earnings forecast a Wall Street brokerage publishes, should start there.
The quarter's backdrop is a July episode that reset expectations sharply. On July 14, IBM released selected preliminary second-quarter figures, including revenue of $17.2 billion, up 1% from the prior year, and adjusted earnings of $2.93 per share, up 5%. MarketWatch described the stock as heading toward its worst day in nearly 40 years after that release. Yahoo Finance put the decline at 25.2%. The same MarketWatch coverage of the July results noted that the earnings figure fell short of expectations. IBM published its final second-quarter results on July 22.
Releasing quarterly earnings early is unusual for a company of IBM's size. MarketWatch characterized the July move as a rare step. The fallout reached beyond institutional portfolios. MarketWatch reported that IBM employees lost more than $400 million in their 401(k) accounts, the US workplace retirement plans, as the share price collapsed.
The stakes are personal for workers whose retirement balances hold a large position in their own employer's stock. A drop of that size can erode savings and undercut the diversification those accounts are meant to provide, which is the practice of spreading money across many holdings so that no single one can do lasting damage.
The price path through the rest of the quarter was harder going. The Motley Fool reported that IBM shares finished the third quarter around $220, down about 22% from where they started the quarter.
In other words, the stock was still absorbing the July reset when the October report arrived.
The third-quarter beat is a clean comparison against a bar that the preliminary release had already lowered. That is a different thing from a return to the earlier trajectory. A ten-cent beat on adjusted earnings, about 3.5% above consensus, is modest in size.
The premarket decline suggests the market was weighing something other than the headline beat, such as revenue quality, guidance, or the durability of the software and infrastructure growth that Seeking Alpha pointed to. One session of premarket trading is a thin basis for any conclusion about the stock's direction.
For the broader lesson, the sequence matters more than any single figure. IBM moved its earnings disclosure ahead of schedule, watched its stock drop by about a quarter in one session, and then beat a lowered bar within three months. That gives investors a clear test of whether the July reset was credible. The October numbers are the first real evidence on that question, and they will need several quarters of confirmation before they carry much weight.
