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3. IBM Corp.

IBM Falls Most in Four Years

Oct. 17, 2018
"They need their new key initiatives, such as the cloud and Watson AI development, to continue to ramp up," said analyst Ivan Feinsethhe. "They are growing, but they are not moving the bigger needle and that’s the issue."

International Business Machines Corp. (IW 500/11) shares dropped the most in four years on Oct. 17 after the company missed analysts’ quarterly revenue estimates, ending a short-lived streak of sales gains and casting doubt on its strategy to boost growth through new businesses like cloud and artificial intelligence.

The stock tumbled as much as 8.1% to $133.43 in New York, bringing losses so far this year to 12%.

CEO Ginni Rometty has been trying to turn around the legacy technology giant, but progress has been inconsistent.

Revenue fell 2.1% to $18.8 billion in the third quarter, while analysts were expecting $19.1 billion.

Cloud revenue, which has become a key metric to watch, grew 10% in the period to $4.5 billion. That was slower than the 20% expansion in the second quarter.

Profit, excluding certain items, was $3.42, IBM said, compared with the average projection of $3.40 a share, according to data compiled by Bloomberg.

Some analysts lowered their price target on the stock. BMO Capital Markets analyst Keith Bachman said he is “not convinced that IBM can generate consistent performance across its portfolio.” He lowered his target to $164 from $172 and retained a market perform rating.

After six years of declining sales, the 107-year-old company showed gains in the first half of the year. Those were largely due to its legacy mainframes, the massive computers that help power global financial transactions and other complicated calculations for businesses and governments.

A new sales cycle for those computers, launched about a year ago, is now winding down and the newer businesses IBM has been counting on to spur future, sustainable growth -- known as “strategic imperatives” -- have expanded over the past three years, but have yet to fulfill their promise. The group includes IBM’s Watson artificial intelligence program, security software and cloud computing.

In the third quarter, revenue from strategic imperatives rose 13% for the past 12 months to $39.5 billion. That was a slower 12-month growth rate than the 15% reported in the previous quarter.

Jim Kavanaugh, IBM’s chief financial officer, said in an interview that the deceleration in cloud and strategic imperatives revenue growth was because of IBM “wrapping up our most successful mainframe product ever.”

Revenue in the Cognitive Solutions unit, which includes many Watson-related products, fell 6% in the third quarter. Sales in the Global Business Services division rose 1%, while Technology Services & Cloud Platforms posted a revenue drop of 2%. The company’s Systems unit saw sales gain 1%, and Global Financing revenue declined 9%.

On a conference call following the report, Kavanaugh said that IBM "fell short" in third-quarter signings in services, but added that the business is expected to ramp up in the next quarter. "We’ve got a chance to exit the year with a very strong position in our services base of business," he said.

IBM is bolstering its appeal to customers by strengthening its AI arm, running 75 active blockchain networks and helping to protect banks from cyberattacks, Kavanaugh said, adding that more than 400 businesses have already embraced IBM’s one-year-old secure Cloud Private program. IBM is "fundamentally changing the way we operate this company," Kavanaugh said on the call.

The real threat for IBM is that demand for its mainframe servers is rapidly fading into nonexistence as "everyone is migrating towards the cloud," said Ivan Feinseth, an analyst with Tigress Financial Partners LLC, before the results were announced.

"They need their new key initiatives, such as the cloud and Watson AI development, to continue to ramp up," he said. "They are growing, but they are not moving the bigger needle and that’s the issue."

On Monday, IBM unveiled a new technology platform to help companies manage security, artificial intelligence and storage services across multiple cloud systems, regardless of where they were built. This is part of IBM’s strategy to make cloud services more compatible with its competitors, rather than taking them head-on as it vies to catch up.

 By Olivia Carville

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Licensed content from Bloomberg, copyright 2016.

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