Media Moves

Coverage: IBM earnings disappoint

January 21, 2015

Posted by Liz Hester

IBM CEO Virginia Rometty has some explaining to do. The technology giant is struggling to make enough money to satisfy investors, and her plans for a turnaround are lagging expectations. IBM had another disappointing quarter, reporting lower revenue for the fourth quarter.

The Wall Street Journal story by Maria Armental had these details about the quarter:

International Business Machines Corp. on Tuesday gave a disappointing forecast for the year as it reported another period of sharply lower profit and revenue to end 2014.

The struggling technology giant, which said in October that it was abandoning its long-held target of making at least $20 a share by 2015, forecast earnings for 2015 of $15.75 to $16.50 a share, below the $16.51 estimated by Wall Street.

The disappointing outlook sent shares down 3.5% after hours.

The fourth quarter marked the 11th consecutive period the Armonk, N.Y, company failed to generate a year-over-year revenue increase. Its profit excluding one-time items easily beat expectations, however.

Steve Lohr reported for The New York Times that Rometty’s plans have included selling some pieces of the business and expanding in other areas:

Under Virginia M. Rometty, who became chief executive in 2012, IBM has been rapidly shifting its portfolio of businesses. She has initiated multibillion-dollar spending programs for data analysis software and skills, cloud computing and Watson artificial intelligence technology — fields that promise high profits and strong growth.

At the same time, the company has sold off businesses that generated several billion dollars in sales but lost money or barely broke even. Units sold recently include its chip-manufacturing operation and its division making smaller server computers. So a falloff in IBM’s overall revenue is, for now, largely by design.

The new businesses are showing encouraging growth. But they are not yet large or profitable enough to offset the erosion of growth and profitability in some of IBM’s traditional hardware, software and services lines. And the new technology, like cloud computing and low-cost data analysis, often adds to the pressure on IBM’s old-line businesses.

How long the transition will take, and how painful it may be, is the question.

That question, certainly, will not be answered by the financial results in a single quarter. And IBM’s fourth-quarter performance provides grist for both the optimist and pessimist camps who closely follow the company.

USA Today’s Craig Wolf said that investors are running out of patience with the company and its plans:

Wall Street analysts have been expecting Armonk, N.Y.-based IBM to earn a consensus estimate of $5.41 per share for the quarter and $24.77 billion in revenue, both of which are lower numbers than the company posted for the same quarter in 2013. That year’s fourth quarter saw $6.13 per share.

Shares of IBM, which announced earnings after the close, were down 19 cents to $156.95. In after-hours trading, shares fell nearly 3%.

IBM stock remains about $40 below its peak. It dropped precipitously after the company’s October report on the third quarter and Rometty’s abandonment of a long-held target of $20 per share in operating earnings by 2015.

Financial media and IBM watchers have been speculating that some form of re-organization may be in store, but the company has not announced anything major.

Forbes reporter Alex Konrad said that IBM is likely to announce a major restructuring in the next couple of months:

IBM brass did not confirm reports of a major restructuring that’s been rumored since early Jan. as The Register’s Paul Kunert reported senior managers were made aware of an overhaul to redefine the company by its major software project areas instead of on a hardware and software line. According to Kreher, analysts didn’t expect IBM to divulge that news on Tues., but would be more likely to make such announcements at the company’s analyst day in Feb. next month.

Schroeter said the company would look to more acquisitions of service players as well as major partnerships like it inked last year with Apple and Twitter as other future boosts to revenue. But Kreher, the analyst, noted that the company’s new guidance for 2015 doesn’t account for any improvement to IBM’s software business. “We found that to be a bit conservative,” he says.

One topic that IBM was glad not to have to discuss anymore was its now-abandoned 2015 Roadmap, an albatross of financial planning put in place by CEO Sal Palmisano that had promised the company would reach $20 in earnings per share by the end of this year. Rometty had affirmed the roadmap upon taking charge, and its pursuit had led IBM to buy back billions of its stock and divest multiple struggling business units to produce short-term earnings jolts even as the company sought more long term boosts to the business like a $1 billion commitment to a Watson business group and analytics tool as well as the pursuit of new contracts like a $325 million supercomputing deal with the U.S. Department of Energy.

IBM has a lot to do in order to regain the trust of investors, analysts and others. What isn’t clear is what effect all of these restructurings are having on employees, morale and momentum. The company is clearly struggling, and Rometty needs to show some changes toward profitability soon.

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