IBM Drops After Revenue Declines for 13th Straight Quarter

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How Much Patience Are Investors Losing Over IBM?

IBM fell the most in nine months after reporting second-quarter sales declines across all of its major business units, missing analysts’ estimates and marking the 13th straight period of falling revenue.

Profit excluding some items was $3.84 a share, International Business Machines Corp. said in a statement Monday, beating the $3.78 average projection from analysts as reduced administrative and research costs offset declines in its services and software businesses. That average had already been cut 4.7 percent from three months ago.

Chief Executive Officer Ginni Rometty has struggled to overhaul the business to be a seller of cloud-computing technology and data analytics. With a 35 percent decline in revenue to BRIC countries in the second quarter and the software business not selling as well as expected, investors are still missing the proof that the company can grow organically.

“Investors are losing patience given the revenue miss,” said Bill Kreher, an analyst at Edward Jones & Co. “It’s a show-me stock.”

IBM, based in Armonk, New York, fell 5.9 percent to $163.07 at the close in New York, the biggest decline since October, when CEO Rometty scrapped a five-year earnings goal instated by her predecessor.

Shifting Market

Revenue from BRIC countries -- Brazil, Russia, India and China -- was dragged down by a 40 percent decline in China, where IBM suffered from signing fewer large transactions, Chief Financial Officer Martin Schroeter said in a conference call. Excluding currency impact and divested businesses, the Chinese market declined 25 percent. Meanwhile, the company saw “volatility” in its results in Russia, he said.

As demand has tumbled for products across all of IBM’s major segments -- services, software and hardware -- Rometty has divested unprofitable businesses and invested in creating new units around cloud computing and the Watson data-analytics tool. Still, the new isn’t growing fast enough to offset the declines of the old.

“The falloff in IBM’s traditional businesses is dwarfing the company’s ability to capture new revenue opportunities as the market shifts,” Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co. wrote in a note Monday before the results were announced.

Within the services business, IBM’s biggest division, revenue for Global Technology Services dropped 10.5 percent as reported while Global Business Services declined 12 percent.

“Parts of our services business aren’t delivering sufficient productivity in the base to fund the investments we are making” and offset the impact of the strong dollar, IBM CFO Schroeter said on an earnings conference call Monday. “We need to drive more productivity to drive the profit profile.”

Currency Impact

IBM saw a 9 percentage-point drag on revenue from the strong dollar in the second quarter, matching its forecast three months ago. Divested businesses accounted for an additional 4 percentage points of sales declines. The company expects 2015 revenue to take as much as an 8 percentage-point hit from exchange rates, more than its forecast for a 7 percentage-point drag three months ago.

Total revenue fell 13 percent from a year earlier to $20.8 billion, or a 1 percent decline adjusting for currency impact. Analysts estimated $20.9 billion on average. The company said it cut total expenses by 7.9 percent from the year-earlier period.

Last quarter, IBM said full-year earnings would greatly hinge on its software business, which saw a sales decline of 10 percent in the second quarter, or a 3 percent decrease when excluding currency impact. That’s tracking toward the low-end of expectations for 2015, Amit Daryanani, an analyst at RBC Capital Markets, wrote in a note.

Maintains Forecast

The hardware business’ sales fell 32 percent as reported.

For more, read this QuickTake: Reinventing IBM’s Reinvention

The company maintained its previous forecast for profit excluding some items for full-year 2015 of $15.75 to $16.50.

Kreher, at Edward Jones, has a buy rating on the stock. He said that while IBM has some near-term struggles, he finds the valuations “compelling.”

“They have taken the necessary steps, taken their lumps if you will,” said Kreher, who anticipates the company will begin growing next year.


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