Coverage: IBM earnings beat expectations

IBM earnings seem to be turning the corner. The company beat analysts’ expectations as new lines of business contributed to the bottom line. Investors have been patient about the turnaround, but is this enough?

Alex Barinka had these details in a story for Bloomberg:

IBM’s first-quarter earnings beat analysts’ estimates that were already significantly lowered, helped by sales of its new mainframe and cloud-computing services.

Profit excluding some items was $2.91 a share, Armonk, New York-based International Business Machines Corp. said in a statement. That compares with the $2.81 average of estimates compiled by Bloomberg. That estimate was already down 8.2 percent in the past three months. Analysts began cutting them after Chief Executive Officer Ginni Rometty said in October that the company would fall short of a long-held profit goal.

New initiatives such as cloud computing and data analytics accounted for 27 percent of the business last year. That’s not enough to make up for revenue lost through divestitures and falling sales for older software and services. Now, Rometty is taking more drastic measures to transform the 103-year-old company, like reorganizing the almost 380,000-employee business to focus on cloud. IBM needs more time to pull it off, said Dan Morgan, a senior portfolio manager at Synovus Securities Inc.

“Are the cloud initiatives, the big data initiatives growing fast enough? The jury is still out,” said Morgan, whose firm oversees about $10.8 billion including IBM shares. “They are showing bits and pieces of those businesses. But, if you look at segment over segment, we are not really seeing it in terms of showing a positive trend.”

The New York Times story by Steve Lohr pointed out that flat revenue isn’t growth and that could be an issue long-term:

Take away the currency effect and the sold-off operations, and IBM’s revenue would have been flat from the year-earlier quarter.

Even so, flat revenue is not growth. IBM’s reported revenue has declined for 12 consecutive quarters. Some of the decline has been by design as IBM sheds operations with lower profit margins, as it has for years, getting out of personal computers, disk drives and most recently low-end server computers and chip manufacturing.

But the open question is how soon — and even whether — the new initiatives can grow faster than its traditional businesses retreats. That improvement should be seen eventually in revenue growth in IBM’s big services and software units, which represent 88 percent of the company’s revenue.

That growth has not yet happened. Excluding the currency effect and discontinued operations, the services and software business each slipped by 2 percent in the quarter.

Monica Langley wrote for The Wall Street Journal that IBM CEO Ginni Rometty is directing workers to “get it fixed,” but it might not be fast enough for investors:

That is a directive Ms. Rometty is giving a lot these days as she tries to reinvent the nearly 104-year-old icon while it continues a yearslong slump. International Business Machines Corp.’s sales for 12 straight quarters have fallen from the year-earlier quarter.

The 57-year-old Ms. Rometty, who goes by “Ginni,” has spent her three years as CEO trying to revamp slowing businesses like big computers and licensed software. She has shifted toward higher-growth markets she has targeted, like “analytics,” which help corporations make sense of their growing data hoards, and “cloud” technologies to manage companies’ operations over the Web and mobile devices.

But many of IBM’s older businesses continue to drag, while divesting some of them has reduced overall revenue. In finding new revenues, Ms. Rometty hasn’t moved fast enough for some investors. The stock is down 9.6% since she became CEO in January 2012, compared with a 67% rise in the S&P 500.

IBM “is at the make-or-break point,” says James Lebenthal, a Rometty supporter and CEO of Lebenthal Asset Management LLC, which holds a small IBM stake. “Ginni needs to balance strategic vision with tactical survival.”

Ms. Rometty (rhymes with confetti) says IBM is at “an inflection point.” But, she says in an interview in her Armonk office last month, she isn’t focused solely on the near-term concerns of some Wall Street critics. “My job,” she says, “is to balance remaking IBM for the moment with an enduring IBM for the future.”

Others in the industry are also struggling, James Niccolai wrote for PCWorld:

Like its rival Hewlett-Packard, IBM has been watching its business shrink for several quarters as customers spend less on expensive hardware and IT services and devote more to cloud computing and mobile.

HP is trying to address the problem by splitting itself into two companies, while IBM has been selling off divisions that produce little profit, like its x86 server division, and investing in areas where it hopes to find growth.

On Monday, it said revenue from those “strategic imperatives,” which include the cloud, analytics and mobile, increased more than 20 percent from a year earlier. But it’s not enough to offset declines elsewhere.

Even allowing for the currency effects, sales fell 2 percent in IBM’s global services division, to $12.2 billion, and 2 percent in its software division, to $5.2 billion.

Its hardware unit got a lift from new products. Revenue from mainframes more than doubled from a year earlier, and even IBM’s Power servers division reported some growth, Schroeter said. The company will finish rolling out its new Power 8 chip across all servers this quarter, he said.

IBM is making progress, but the turnaround is slow. While they are reconfiguring the business and moving into new areas, the revenue is still lacking. Every quarter that Rometty isn’t able to show some progress is a strike against her plans. Investors are sure to demand returns at some point and that day is drawing closer.