IBM’s Profit Tops Estimates on Mainframe, Cloud Services

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IBM Profit Beats Estimates on Cloud, Mainframe Sales

IBM’s first-quarter earnings beat analysts’ estimates that were already significantly lowered, helped by sales of its new mainframe and cloud-computing services.

Profit excluding some items was $2.91 a share, Armonk, New York-based International Business Machines Corp. said in a statement. That compares with the $2.81 average of estimates compiled by Bloomberg. That estimate was already down 8.2 percent in the past three months. Analysts began cutting them after Chief Executive Officer Ginni Rometty said in October that the company would fall short of a long-held profit goal.

New initiatives such as cloud computing and data analytics accounted for 27 percent of the business last year. That’s not enough to make up for revenue lost through divestitures and falling sales for older software and services. Now, Rometty is taking more drastic measures to transform the 103-year-old company, like reorganizing the almost 380,000-employee business to focus on cloud. IBM needs more time to pull it off, said Dan Morgan, a senior portfolio manager at Synovus Securities Inc.

“Are the cloud initiatives, the big data initiatives growing fast enough? The jury is still out,” said Morgan, whose firm oversees about $10.8 billion including IBM shares. “They are showing bits and pieces of those businesses. But, if you look at segment over segment, we are not really seeing it in terms of showing a positive trend.”

Strong Dollar

Sales of $19.59 billion fell short of projections for $19.64 billion.

IBM rose 0.2 percent to $166.51 at 7.07 p.m. in New York trading after the close of markets, though climbed as high as $171.27 following the earnings release. The stock has dropped 14 percent in the past year.

The strong dollar continued to drag on IBM’s results, with an 8 percentage point negative impact on sales, the company said. In the past six months, the dollar climbed 19 percent against the euro and 11 percent against the yen.

Sales in services, IBM’s biggest business, fell 12 percent to $12.2 billion. The division’s revenue declined 2 percent adjusting for currency impact and divested businesses. Software sales fell 8 percent to $5.2 billion, or a 2 percent fall after adjustments.

Software Performance

IBM’s earnings performance will greatly depend on how the software division does this year, Chief Financial Officer Martin Schroeter said on a conference call. The low end of the company’s forecast assumes the unit’s revenue continues shrinking, while the high end projects sales will be flat, he said.

Hardware sales fell 23 percent as reported. Excluding the foreign-exchange impact and the sale of its low-end server business to Lenovo Group Ltd., revenue increased 30 percent.

The company maintained its outlook for full-year operating profit of $15.75 to $16.50. Analysts had projected an average of $15.86, according to data compiled by Bloomberg.

Net income fell 2.3 percent to $2.33 billion, or $2.35 a share, from $2.38 billion, or $2.29, a year earlier.

IBM has been trying to keep up with an industrywide shift where businesses are increasingly demanding cloud-delivered software and service, where customers pay subscriptions for technology stored offsite, instead of products that are paid for upfront and installed on clients’ computers. Competitors like Oracle Corp., Microsoft Corp. and SAP AG have navigated similar moves.

Watson Technology

After Rometty chopped IBM’s long-held 2015 earnings goal, sending the stock down almost 9 percent since October, she has bet on investors’ patience while she works to reinvent the company. She has created designated business units around IBM’s Watson data analytics technology, a cloud offering for health-care companies and the cloud-computing business. She’s also forged partnerships to create technologies with Apple Inc., Twitter Inc. and Johnson & Johnson -- though IBM has yet to disclose revenue from any of those tie-ups.

“IBM has taken the right steps to realign its portfolio,” Maynard Um, an analyst at Wells Fargo Securities LLC who rates the shares market perform, said in an April 14 note. Still, “the pressures from the declines in legacy businesses will remain higher over the near term.”

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