By STEVE LOHRAPRIL 16, 2014
IBM is investing heavily in the future. It has placed multibillion-dollar bets on businesses to deliver computing remotely over the Internet cloud, on sophisticated data-analysis software and on its Watson artificial-intelligence technology.
But the giant technology company faces a classic bind: Can the new offerings grow fast enough to offset the erosion of its traditional hardware and software businesses?
The company’s first-quarter results underline the challenge. The company reported on Wednesday that its profit fell and its revenue declined. It is the eighth consecutive quarter in which IBM’s revenue has slipped, with this quarter being hit hard by the falloff in its hardware business.
Revenue for the quarter was $22.5 billion, compared with $23.4 billion in the year-earlier quarter. Sales came in below the average estimate of Wall Street analysts of $22.9 billion, as compiled by Thomson Reuters.
IBM’s net income fell 21 percent to $2.4 billion, compared with $3 billion a year earlier. Operating earnings per share fell 15 percent, to $2.29. The company’s profit performance matched the analysts’ forecast of $2.54 a share. The percentage decline in earnings per share was less than in net profit because there were fewer shares outstanding. The company steadily buys back its shares.
IBM reported its results after the close of the stock market. In after-hours trading its stock price fell about 4 percent from the closing price of $196.40 a share.
In a statement, Virginia M. Rometty, IBM’s chief executive, pointed to moves taken to “transform parts of the business” and said that later in the year “we will begin to see the benefits from these actions.”
The weakness in the company’s hardware business, where sales slid 23 percent, was no surprise. IBM is not expected to have a new mainframe computer offering until next year, so this is a period when the sales of the current models are trailing off. And IBM’s lines of smaller server computers, used in data centers, continue to struggle. In January, the company agreed to sell off its unit that makes industry-standard servers, which are powered by chips like those used in personal computers and made by Intel and Advanced Micro Devices, for $2.3 billion to Lenovo of China. That sale will not be completed until later in the year, so that business remains on IBM’s books until then.
IBM’s quarterly profit was hurt by a charge of $870 million for the severance costs for workers laid off. Every year, the company, which employs more than 400,000 people worldwide, sheds employees in markets and product areas that are declining and adds workers in other units.
IBM also continually shifts its portfolio of businesses, in line with its strategy to shed lower-profit products and invest in higher-margin fields. Over the years, IBM has sold off its personal computer and storage disk-drive divisions, and this year it sold its industry-standard server business. In February, the company completed the sale of a services unit, which had annual revenue of more than $1 billion a year but was a labor-intensive operation that ran call centers.
In keeping with its strategy, IBM has long said its business model is geared to deliver profit growth rather than sales growth. But investors, analysts say, are anxious to see signs of revenue growth, especially since cost-cutting and share repurchases have played a large role in IBM’s strong earning performance in recent years. “Investors are increasingly skeptical of the quality of IBM’s earnings,” said A.M. Sacconaghi, an analyst at Bernstein Research.
Under Ms. Rometty, who became chief executive two years ago, IBM has made large investments in big data analytics and cloud computing. In last three months, said Frank Gens, chief analyst at IDC, the investment program has “gone into hyperdrive,” including billion-dollar commitments to make Watson a mainstream business, build out a network of cloud-style data centers and push its traditional software onto the cloud to attract outside software developers.
“IBM is doing all the right things,” Mr. Gens said. “The question is how fast it can go.”