IBM revenue misses on weakness in its biggest unit; shares fall 5%

(Reuters) – International Business Machines Corp (IBM.N) missed Wall Street estimates for quarterly revenue on Wednesday, as its global technology services unit was hit by weakness in some European markets, sending its shares down 5% in extended trading.

IBM, which wrapped up its acquisition of Linux maker Red Hat Inc earlier this year, has faced years of revenue decline amid its shift to the cloud from its traditional businesses, including mainframe servers.

Sales from global technology services, IBM’s biggest unit that caters to some of the world’s largest data centers, were weighed down by lower client business volumes, mainly in the UK and Germany, Chief Financial Officer James Kavanaugh said on a post-earnings call.

After a down-cycle, the company expects mainframe business to return to a normal product cycle in the fourth quarter, Kavanaugh told Reuters.

Revenue from IBM’s cloud services rose 11% to $5 billion, helping the company beat profit expectations for the quarter.

Total revenue fell 3.9% to $18.03 billion, missing analysts’ average estimate of $18.22 billion, according to IBES data from Refinitiv. Excluding the impact from currency and business divestitures, revenue dropped 0.6%.

IBM’s global technology services unit reported a 5.6% drop in revenue to $6.70 billion.

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Chief Executive Officer Ginni Rometty, who has led IBM for more than seven years, is betting on subscription-based software offerings with the Red Hat deal, the company’s biggest acquisition so far.

However, IBM has said that it would report only a portion of Red Hat’s actual revenue for some quarters, while recording all its expenses as required by U.S. accounting standards.

The cloud and cognitive software unit, which includes Red Hat, reported a 6.4% rise in revenue to $5.28 billion for the third quarter ended Sept. 30.

Net income fell to $1.67 billion, or $1.87 per share, from $2.69 billion, or $2.94 per share, a year earlier.

Excluding special items, the company earned $2.68 per share, 1 cent above analysts’ estimate.

The Dow component’s shares, which have gained about 25% this year, were down 5.4% at $134.44 in extended trading.