Wells Fargo analyst, Maynard Um, reiterated his Market Perform rating on shares of IBM (NYSE: IBM) and cut his valuation range to $155.00 to $170.00 from $175.00 to $185.00 after FY18 guidance became more back end loaded and the EPS beat was due to a lower tax rate while gross margin fell to the lowest level since 2011.

Positive Points:
1) continued strong growth in strategic imperatives up 13% y/y at cc
driven by cloud (up 35%), mobile (up 22%), analytics (up 7%) and social (up
10%), while security was down 3%
2) reiterated FY18 EPS guide of at least $13.80 though more back end loaded
3) Q1 EPS was slightly ahead of our and consensus est. due to lower taxes
4) cognitive solutions revenues were slightly ahead of our est. driven by 5% y/y growth in constant currency (cc) in solutions software
5) intellectual property licensing revenues were higher than our est.
6) storage revenues were up 7% at cc driven by double-digit growth in all-flash arrays
7) signings grew 2% y/y

Negative Points:
1) gross margin of 44.5% were 3pts below our estimate due to weakness across all segments and declined 3pts y/y to the lowest level since Q1 2011
2) Q2 EPS guidance implies a more back half loaded year
3) Q1 pre-tax income was $600MM below our estimate but EPS was in line due to discrete tax
items
4) systems sales and margins were significantly below our estimates due to declines in mainframe (late in the product cycle) and power systems partially offset by growth in storage (all-flash arrays driving growth)
5) TS&CP (technology services and cloud platforms) sales were lower due to delay in some
signings (though not macro related)
6) free cash flow of $1.1B was below our estimate though reiterated FY17 target of flat y/y

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Shares of IBM closed at $170.05 yesterday.