IBM

IBM stock drops $8 a share after earnings disappoint

Craig Wolf
Poughkeepsie Journal

Investors took IBM Corp. shares down as the regular markets opened Tuesday, the day after a disappointing earnings report. The price stayed down all day. Shares closed at $140.64, down $8.58, a 5.75 percent decline.

Despite an earnings-per-share "beat" of Wall Street expectations, sellers dominated buyers as they looked at lower revenues and a reduced forecast for what the rest of the year will look like.

It was the lowest closing price for IBM since October of 2010, nearly five years.

For a company in a down trend that says it's turning around on the strength of updated strategies in tech, IBM Corp. has yet to show it.

IBM Monday reported its third-quarter earnings per share were $3.34, down 9 percent from a year ago, but four cents better than the Wall Street consensus had expected.

IBM's story is that it has charted an upward path, but that it takes time.

Revenues came in at $19.3 billion, down 14 percent as reported, but down only 4 points if the impact of the divested System x server business is taken into the calculation. However, this was a miss compared with what the street had expected, by about $300 million. It was the 14th straight quarter in which revenues were below what they had been a year earlier.

Net income, or operating profit, was $3.3 billion, down 11 percent.

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In trading Monday, which ended before IBM's report, shares were down $1.17 to close at $149.22. But in after-hours online trading, IBM dropped further, at times to the tune of about $7 down, which is about 5 percent.

Another drop: Its full-year guidance, or company estimate of earnings, including the fourth quarter, was trimmed $14.75 to $15.75, down from the previous $15.75 to $16.50.

Chief Financial Officer Martin Schroeter told reporters, "We are getting results," commenting on new strategies. He said, "We're going to manage for the long term and we're confident in our strategy."

Two analysts on a conference call probed Schroeter on just how long it would take to see the strategies kick in.

"Should we expect it to get worse before it gets better?" asked Tien-Tsin Huang of JP Morgan Chase.

Schroeter didn't give an answer in quarters, but said that in the Global Business Services segment, "It's a business that takes time to shift." He added, "There is absolutely a high-value strategy for this business." Global Business Services were down 13 percent.

"Strategic imperatives" revenue, covering key new initiatives in tech, were up 27 percent, adjusting for the divested businesses. This broad area covers cloud computing, analytics, social, mobile and security.

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Closely-watched cloud computing revenue was up more than 65 percent year-to-date adjusting for both currency and divested business, with total revenue of $9.4 billion over the past 12 months.

"In the third quarter we again made progress in the transformation of our business to higher value, with strong growth in our strategic imperatives and expanded operating margins," said Ginni Rometty, IBM chairman, president and chief executive officer. "We are continuing to make significant investments to build platforms around analytics, cloud, mobility and security that lay the foundation for a new era of cognitive business — where we see longterm value for our clients and shareholders."

Despite the downward trend in hardware numbers, Schroeter said, "Our hardware business continues to do well, particularly in our mainframe and power systems where they've grown again for the third straight quarter."

That's a good sign for Poughkeepsie, home base for mainframes, and home to several thousand IBM workers and more people at supporting companies.

One analyst asked about the mainframe "product cycle," which tends to soar when a new line emerges and then fade as quarters go by.

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"We will wrap on the mainframe cycle at some point, but the mainframe cycle is not going to have a profound impact on the overall IBM," Schroeter said. He added, "Profit margins start to expand in the mainframe business as we get to the later parts of the cycle."

He didn't go into the whole story, but what happens as a model gets older is that IBM rolls out a new, upgraded system that renews the cycle again. This model's sales for the quarter, if measured in computing power rather than dollars, rose 18 percent for the quarter year over year.

Though revenues for the hardware segment were $1.5 billion for the quarter, down 39 percent, the portion from z Systems mainframes grew 15 percent from the year-ago period. Revenues from Power Systems were down 3 percent.

Job cuts figured into IBM's quarterly results. A charge of about $100 million was taken for cuts made during the quarter. Schroeter cited "a higher level of workforce rebalancing and a lower level of performance-based compensation" as fiscal factors. He did not divulge the number of people who lost their jobs, or what countries they were in. The job cuts were reported by the Poughkjeepsie Journal in July, based on research done by the worker group, Alliance@IBM.

IBM said that it had a services backlog of $118 billion, up 1 percent, adjusting for currency. Software revenue fell by 10 percent.

The reported results compared with the average of brokerage analysts' predictions, who had expected earnings per share of $3.30 on an operating basis, compared with $3.68 a year ago, and with total revenue that had been expected to be $19.6 billion, which was down from $22.4 billion a year ago.

Back In July, based on rates then, the company said it expected currency to impact revenue growth by approximately 8 to 9 percentage points for the third quarter of 2015. IBM said it still expects a 4-point impact to revenue growth in each of the first three quarters of 2015 due to the divestiture of the System x business in October 2014. Those two factors were estimated to impact, negatively, full-year earnings by about $0.80.

Craig Wolf: 845-437-4815; cwolf@poughkeepsiejournal.com; Twitter: @craigwolfPJ

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