IBM has missed market estimates for quarterly revenue as its managed infrastructure business suffered from a decline in orders ahead of a spinoff next month, sending its shares down 4 percent in extended trading.
The lower-margin, legacy unit provides technical support to IBM's clients and has shrunk in recent years as companies moved to the cloud, becoming a drag on Big Blue's earnings.
"As we issued the effective date for the spin-off of our managed infrastructure business, our clients paused all new project activities at the end of September and that impacted us here," Chief Financial Officer James Kavanaugh said in an interview.
Revenue at the global technology services unit, which houses the business set to be called Kyndryl after the spinoff, fell 4.8 percent to US$6.15 billion in the third quarter ended Sept. 30.
Kavanaugh also said demand dropped at the systems business, home to IBM's mainframe computers, as the end of the product cycle neared, driving a 12 percent fall in the unit's revenue.
The slowdown in the legacy business has prompted 110-year-old IBM to shift focus to hybrid-cloud, an area where it sees a US$1 trillion market opportunity, to boost growth and better compete with Amazon and Microsoft.
Revenue at the cloud and cognitive software unit was up 2.5 percent at US$5.69 billion but missed analysts' estimates of US$5.77 billion, according to Refinitiv data.
The weakness at IBM's "supposedly high-growth areas is more problematic" than the revenue miss, said Wedbush analyst Moshe Katri.
Total revenue rose slightly to US$17.62 billion, missing expectations of US$17.77 billion.
But IBM's revenue adjusted for the Kyndryl spinoff was 2.5 percent higher, helped in part by firmer demand for its consulting services from enterprises digitizing their operations during the COVID-19 pandemic.
IBM earned US$2.52 per share on an adjusted basis, compared with estimates of US$2.50.