IBM first-quarter margins miss estimates, shares fall

By Pushkala Aripaka and Munsif Vengattil

(Reuters) - International Business Machines Corp (NYSE: IBM) posted profit margins that fell short of Wall Street expectations on Tuesday, a sign that its reinvention was taking time.

Shares of the technology company fell 6 percent in after-hours trade even as it reported the second quarter of revenue growth after a near six-year streak of declines.

IBM has in recent years shifted its focus to higher-margin businesses such as cloud computing, cybersecurity and data analytics, to counter a slowdown in its legacy hardware and software businesses, but the move is not going as fast as some shareholders had hoped.

While IBM's revenue and profit beat expectations, the company's adjusted gross profit margin fell to 43.7 percent from 44.5 percent a year earlier.

The company said the decline in gross margin was mostly due to "significant" one-time charges.

On an earnings call with analysts, IBM CFO James Kavanaugh said the company cut costs and took a $610 million charge in the first quarter, though he did not give details.

This announcement follows expectations of layoffs as IBM, under its Chief Executive Ginni Rometty, tries to offset declines from its legacy businesses.

"The margins were well below the expectations," Pivotal Research analyst Lou Miscioscia said.

The company said it had a tax benefit of $810 million, due to changes in the U.S tax law.

Wedbush Securities analyst Moshe Katri said IBM's legacy hardware business continuing to weigh on margins. "It's not necessarily about topline growth; its about profitable growth," Katri said.

In addition, IBM said it continues to expect full-year adjusted earnings per share of at least $13.80, while analysts were expecting more, with the consensus at $13.83, according to Thomson Reuters I/B/E/S.

"We delivered exactly what we said 90 days ago. The $13.80 is an 'at least' and it's up 1 to 2 percent year over year," Kavanaugh told Reuters in an interview.

IBM's revenue grew 5 percent to $19.07 billion in the quarter with 65 percent growth in sales from security services. Cloud revenue grew 25 percent.

Net profit fell to $1.68 billion, or $1.81 per share, in the first quarter ended March 31, from $1.75 billion, or $1.85 per share, a year earlier.

Excluding items, the company earned $2.45 per share, beating the analyst average estimate of $2.42.

"We feel very comfortable as we enter the second quarter and the remainder of the year that we can actually deliver moving forward," Kavanaugh said.

(Reporting by Pushkala Aripaka and Munsif Vengattil in Bengaluru; Editing by Arun Koyyur and Cynthia Osterman)

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