IBM Shares Sink on Unexpected Revenue Drop

Investors express their impatience with the pace of IBM's turnaround effort by sending its shares down nearly 5% to $161.84.
Matthew HellerApril 19, 2017

IBM reported a bigger-than-expected drop in revenue amid the continuing weakness of its legacy hardware and software businesses and a surprising decline in its cloud infrastructure segment.

Big Blue has been reorganizing itself around a set of emerging cloud, security, and data analytics businesses that CEO Ginni Rometty has dubbed the company’s “strategic imperatives.” In the company’s first-quarter report, she hailed the “robust performance” of those businesses, singling out “IBM Cloud and our cognitive solutions.”

Revenue from “strategic imperatives” was $7.8 billion in the latest quarter, accounting for 42% of total revenue, up from 37 percent a year earlier.

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But total revenue fell 2.8% to $18.16 billion, missing analysts’ estimate of $18.39 billion. It was IBM’s first miss on revenue in five quarters — with the surprising 2% decline in infrastructure services being partly to blame.

“Infrastructure services, which makes up two-thirds of [the Technology Services/Cloud] segment, had been the most stable business in the portfolio over the past few years, consistently growing low single digits,” analyst David Grossman of Stiffel Nicolaus said in a client note, noting that the sub-segment’s gross margin declined 200 basis points.

He added, however, that “we continue to believe that IBM is doing the right things to position themselves for longer-term sustainable growth, even if the transition is testing our patience.”

Investors expressed their impatience by sending IBM’s shares down nearly 5% to $161.84 in trading Wednesday. At current levels, Reuters reports, the stock is set to more than erase its roughly 2.5% gain this year.

“I think the frustration lies with the overall miss on revenue,” Edward Jones analyst Bill Kreher told Reuters. “The Street has given IBM some credit over the last year that the transition is taking shape, so I think that’s where the risk lies … execution needs to be strong.”

During the conference call following the first-quarter report, analysts questioned CFO Martin Schroeter about IBM’s profitability, noting that the company had recently said it was going to see “stabilization” of profit margins.

“The first quarter is always the low point in the year” for margins, he replied.