The Cloud

Third Quarter Brings Little Relief for IBM Shareholders

The company's shift from its legacy businesses to cloud computing continues to be painful as sales drop a greater-than-expected 14%.
Matthew HellerOctober 20, 2015
Third Quarter Brings Little Relief for IBM Shareholders

IBM’s third quarter repeated a discouraging pattern for investors with revenues falling a greater-than-expected 14% to $19.29 billion as the company shifts from its traditional businesses toward cloud computing.

It was the 14th straight quarterly revenue drop for IBM. The company blamed it in part on the stronger U.S. dollar, which made its products more expensive overseas.

Adjusted earnings per share for the quarter were $3.34, ahead of the $3.30 expected by Wall Street, but well below earlier estimates as high as $3.78. For the fiscal year, IBM expects earnings per share of between $14.75 and $15.75, down from the previous guidance of between $15.75 and $16.50 share.

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The revenue shortfall and weaker earnings guidance sent IBM stock down nearly 5%, to $142, in after-hours trading Monday.

Big Blue has been shedding unprofitable hardware businesses as it reorganizes itself around a set of emerging cloud, security, and data analytics businesses that CEO Ginni Rometty has dubbed the company’s “strategic imperatives.”

During the third quarter, revenue from those businesses grew by 17%, down slightly from the previous quarter’s 20% growth rate. They now account for 27% of IBM’s total revenue in 2014.

“In the third quarter, we again made progress in the transformation of our business to higher value,” Rometty said in IBM’s earnings release.

But according to The Wall Street Journal, growth in cloud computing isn’t yet making up for the company’s overall revenue declines. Anything less than very rapid growth in the cloud indicates that IBM is losing ground to rivals, analysts say.

“They’ve been talking about their growth businesses and how they’ve been growing at 20% or 30%, but the important thing is moving the needle for the company overall, because some of those solutions are effectively cannibalizing their old businesses,” Toni Sacconaghi, an analyst with Sanford C. Bernstein & Co. told the WSJ.

To turn things around, Forbes said, IBM may have to make more aggressive acquisitions in software and the cloud and pour more resources into the “strategic imperatives” to keep growth in the ballpark of that 30% target.

“Pressure’s very high for the IBM team to execute,” Bill Kreher, an analyst at Edward Jones, told Forbes.