IBM Shares Tumble After Sixth Quarterly Sales Decline

International Business Machines Corp. (IBM), the largest computer-services provider, dropped the most since April after sales fell for the sixth straight quarter and its hardware business posted a loss.

Revenue fell 4 percent to $23.7 billion in the third quarter, the Armonk, New York-based company said in a statement after trading closed yesterday. That was $1 billion less than analysts had estimated, according to data compiled by Bloomberg.

IBM’s shift to higher-margin software and services has failed to make up for a slump in sales of servers and other computer hardware. Even the company’s traditional growth markets -- developing economies overseas, including China -- aren’t helping prop up sales. IBM posted the first revenue decrease in those markets in its history last quarter.

“IBM has been challenged with changing the model on the hardware front, and now the growth markets are a surprise drop,” said Chris Ambrose, an analyst at Gartner Inc. While pursuing higher-margin markets is the right move, “they still have to show revenue growth at some point,” he said.

IBM shares fell as much as 7.6 percent to $172.57, the biggest intraday decline in six months. The stock, which had already dropped 2.5 percent this year through yesterday, is now trading at its lowest price in more than two years.

Photographer: Craig Warga/Bloomberg

International Business Machines Corp. has been shifting its focus to the software business as demand for hardware products, including computer servers, continue to decline. Close

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Photographer: Craig Warga/Bloomberg

International Business Machines Corp. has been shifting its focus to the software business as demand for hardware products, including computer servers, continue to decline.

Hardware Losses

The company lost $713 million in its hardware business in the first nine months of this year, compared with $253 million in profit in the year-earlier period. Revenue from growth markets shrank 9 percent last quarter. Chinese sales tumbled more than 20 percent as the country worked on a plan for economic policy, Chief Financial Officer Mark Loughridge said on a conference call.

To make up for the slowdown, the company is looking to cloud computing -- the delivery of software and services online -- and it divulged revenue from that market for the first time yesterday. IBM said it generated more than $1 billion in revenue from cloud products and services in the quarter. The disclosure follows an investigation by the U.S. Securities and Exchange Commission into the finances surrounding IBM’s cloud business.

Net income rose 5.7 percent to $4 billion, or $3.68 a share, from $3.8 billion, or $3.33, a year earlier. Excluding some items, earnings were $3.99 a share in the period, topping the $3.96 predicted by analysts. That number was helped by a lower-than-anticipated tax rate of 17 percent, down 7.7 points from a year ago. The company got a boost from foreign tax audits and the divestiture of a retail store business.

Tax Advantage

The more favorable tax rate contributed 30 cents to earnings, David Grossman, an analyst with Stifel Nicolaus & Co., said in a note to investors today.

“IBM has always viewed the tax rate as an operational lever,” he said.

The company is working to rid itself of commodity products, shifting instead toward software-focused businesses that generate higher profit margins. IBM yesterday reiterated its goal of reaching $20 a share in earnings by 2015, up from $15.25 last year.

IBM agreed to sell off its customer-service unit to Synnex Corp. (SNX) for $505 million in September. It’s also spending more than $800 million to buy Trusteer Inc., a software security company, people familiar with the deal said in August.

In July, IBM acquired SoftLayer Technologies Inc., a cloud-computing storage provider that will help it compete with Amazon.com Inc. It paid almost $2 billion this year for the Dallas-based company, said a person with knowledge of the transaction.

Management Shakeup

IBM’s hardware business continued to drag the company down, with revenue declining 17 percent in the third quarter. Chief Executive Officer Ginni Rometty shook up the management of the division in April, replacing Rod Adkins with Tom Rosamilia, who had been overseeing corporate strategy.

“We are taking action to improve execution in our growth markets unit and in the elements of our hardware businesses that are under performing,” Rometty said in yesterday’s statement.

The company had also been trying to sell parts of its server division to Lenovo Group Ltd. (992), before discussions broke down in early May due to disagreements over price, people familiar with the matter said at the time.

In the second quarter, IBM spent $1 billion to restructure its workforce, cutting more than 3,300 jobs in the U.S. and Canada alone, according to Alliance@IBM, an employee group. Loughridge, the company’s finance chief, said earlier this year that divestitures will make up for that expense.

To contact the reporter on this story: Sarah Frier in New York at sfrier1@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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