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Shares of IBM (NYSE:IBM) are down nearly 5% in premarket trading Tuesday after the company trimmed its annual guidance for free cash flow.
IBM reported Q2 revenue of $15.54 billion, topping the consensus estimates of $15.16 billion. The company also reported an operating EPS of $2.31, above the expected $2.29 per share.
Revenue from consulting services came in at $4.81 billion, above the analyst consensus of $4.64 billion. The company generated $6.17 billion in software revenue, missing the estimates of $6.3 billion.
Infrastructure revenue stood at $4.24 billion, while analysts were looking for $3.76 billion. Financing revenue totaled $146 million, compared to the consensus projection of $185.2 million.
Adjusted gross margin stood at 54.5% in the quarter, compared to the projected 56.4%. Free cash flow was reported at $2.09 billion.
For the full year, IBM expects $10 billion in free cash flow, down from the previous forecast range of $10 billion to $10.5 billion. The FCF outlook cut is weighing on shares in premarket Tuesday.
The company also said it expects “constant currency revenue growth at the high end of its mid-single digit model.”
“In the quarter we delivered good revenue performance with balanced growth across our geographies, driven by client demand for our hybrid cloud and AI offerings,” the company said.
Morgan Stanley analyst Erik Woodring said IBM delivered “solid” results, although “not without blemishes.”
“2Q results outperformed expectations by 2-4% and CY22 constant currency rev growth guide was left unchanged, suggesting solid underlying demand & a largely unchanged OW thesis. But FX and cost pressures are incremental headwinds resulting in a 1-6% cut to CY22 revs/EPS,” Woodring said in a client note after slashing the price target on IBM to $155 from $157.
On the other hand, UBS analyst David Vogt is much more pessimistic about the outlook for IBM stock as he reiterated a Sell rating and a $118 per share price target.
“While mainframes were a + surprise, we believe the material deceleration in Software cc growth (3 pts QoQ) and a Consulting book to bill of just 1.0 (down from 1.1 last qtr) is the key takeaway. Our analysis indicates that organic growth has peaked at the same time IBM’s P/E multiple is at multi-year highs on both an absolute and relative basis, an unfavorable risk/reward. While we lower Q3:22 rev growth by 3 pts to just 4% YoY, the bigger risk to IBM shares in our view is the implied Q4:22 outlook. As IBM laps the Kyndryl bump in a little over 3 months, we expect Q4:22 rptd growth to decline 4% YoY and come in flat on a cc organic basis, down from ~9% rpted in Q2:22,” Vogt explained in a client note.
