LONDON (ShareCast) - (ShareCast News) - IBM shares fell after profit margins shrank and underlying revenue flatlined in the first quarter, suggesting slow progress in its shift towards more profitable businesses.


The US technology company's net income fell to $1.68bn in the three months to the end of March from $1.75bn a year earlier. Revenue rose 5% to $19.1bn, a second quarter of growth after more than five years of declines. But revenue was unchanged when adjusted for currency movements.

IBM's gross profit margin narrowed to 43.2% from 43.8% a year earlier. Analysts had on average expected margins to widen to 45.1%, according to Berenberg analysts. Pre-tax profit fell 20% to $1.1bn, undershooting analysts' average forecast.

IBM shares dropped 5.1% to $152.70 in premarket trading as investors responded to the earnings statement, released after the market closed on 18 April.

The Berenberg analysts, who recommend selling IBM shares, said: "The worsening gross margins and currency headwinds led to a 27% pre-tax profit miss ... Given the well-known shortlived nature of mainframe cycles, we feel the underlying trends do not support any reassessment of our negative stance on IBM."

IBM has shifted its business towards cloud computing, cyber security and data analytics - a move designed to grow in higher margin activities to offset slowing growth from its traditional hardware and software products.

James Kavanaugh, IBM's chief financial officer, said the results showed the company's strategy was paying off and that the company had "broad-based improvement in our gross margin trajectory". The company said thinner margins for the quarter were caused mainly by significant one-time items.

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