IBM revenue falls in 1st quarter

Bloomberg NewsApril 16, 2014 

Ginni Rometty’s profit goal for IBM just got harder to reach.

First-quarter revenue for the computer-services company led by Rometty fell 3.9 percent from a year earlier to $22.5 billion, with sales continuing to tumble in its hardware unit and in developing countries. Analysts had estimated $22.9 billion on average.

The company took an $870 million charge for job cuts, sending adjusted earnings down 15 percent to $2.54 a share, in line with estimates.

Chief Financial Officer Martin Schroeter forecast a “very weak” first quarter in January, and IBM delivered. Now the company has to make up more ground to end the year with an increase in profit. The company reiterated its projection for 2014 adjusted earnings of at least $18 a share this year, even as sales fall amid an industrywide shift to cloud computing.

“For the stock to move meaningfully higher from the current valuation, we think IBM will need to demonstrate the company can grow revenues, not EPS,” Keith Bachman, an analyst at BMO Capital Markets, said in a note to investors before the earnings report.

IBM shares fell 3.9 percent in late trading.

In each of the past three years, first-quarter earnings have made up 18 percent of IBM’s full-year results. If IBM gets $18 a share in profit this year, the first quarter will have represented just 14 percent of the total. That means the company is counting on substantial improvement later this year.

Even before today’s results, analysts estimated IBM would have adjusted earnings this year of $17.91 a share – below Rometty’s forecast.

IBM, which employs thousands of people at its Research Triangle Park campus, is targeting $20 a share in adjusted earnings by 2015, up from $11.67 in 2010 – a pledge instated by former Chief Executive Officer Sam Palmisano and sustained by Rometty, who succeeded him in 2012.

To get there, Rometty has tried to shift the company’s focus to cloud services and data analytics to keep up with changes in the industry. Technology customers are increasingly storing data and software on cloud-computing networks, rather than on-site, limiting their need for servers and mainframes.

IBM spent more than $1 billion to create a new group around its Watson technology, which analyzes large troves of data in plain English. Rometty bought cloud provider SoftLayer Technologies in 2013 for $2 billion and this year committed an additional $1.2 billion to bolster its data centers and offerings.

Cloud revenue grew more than 50 percent last quarter, and cloud offerings delivered as a service are now at an annual run rate of $2.3 billion. That’s still a fraction of IBM’s total $100 billion in revenue last year.

Rometty has also been getting out of less profitable businesses. IBM sold its customer-care unit to Synnex for $505 million in September. A $100 million gain from the deal was recognized in the first quarter.

Leaving out that unit’s results and adjusting for currency changes, IBM’s first-quarter sales would have dropped only 1 percent from a year earlier, the company said.

Another asset sale is on the way. China’s Lenovo Group agreed to buy IBM’s low-end server business for $2.3 billion. The deal is awaiting government review before closing, and the companies must convince U.S. officials that it won’t give China back-door access to secrets and infrastructure.

Even with the changes, the company has struggled in its transition, prompting Rometty and her executive team to forgo bonuses last year.

“We would have preferred for IBM to wipe the slate clean, suspend EPS guidance and focus on transitioning the business to higher-growth revenue opportunities across all divisions,” Brian Marshall, an analyst at International Strategy & Investment Group, said in a note to investors before the release.

Lagging demand for IBM’s hardware division continues to drag down revenue, with the unit’s sales falling 23 percent to $2.4 billion in the first quarter. Sales in developing countries slid 11 percent, or 5 percent when adjusting for currency fluctuations.

Lower-than-expected taxes may help Rometty make some progress toward her profit goal. The company reduced its forecast for this year’s tax rate to 20 percent from 23 percent. It’s still up from 15.6 percent in 2013.

The company will be relying on its global business services and software units, which together make up about three-quarters of sales, to reach the profit goals.

IBM shares had gained 4.7 percent this year through Wednesday’s close of $196.40, compared with a less than 1 percent gain for technology companies in the Standard and Poor’s 500 Index.

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