Robert McMillan and Nathan Becker | WSJ
Jan. 19, 2016
International Business Machines Corp. has been working furiously to reinvent itself for the cloud computing era, but the weakening global economic climate raises the question whether 2016 will bring a much-needed turnaround.
The 104-year-old tech giant spent much of 2015 lowering investor expectations, and on Tuesday the company warned that earnings for the coming year will be lower than expected.
Noting that a strong U.S. dollar would take a $1.3 billion bite out of pretax profit, IBM said it expects earnings per share of $13.50 for 2016. Analyst had expected annual EPS in the $15 range.
The company’s revenue in the fourth quarter fell 8.5%, making for 15 straight quarters of declining sales.
Still, the top line came in better than the $22.02 billion Wall Street expected. The cloud computing, data analytics, security and mobile computing products on which IBM has bet its future grew at a strong pace. Those businesses accounted for about 35% of IBM’s full-year 2015 revenue, or $28.9 billion, said IBM Chief Financial Officer Martin Schroeter.
“We’re transforming a big company,” Mr. Schroeter said in an interview on Tuesday. “We’ve always said that this was going to take time.”
The rise of cloud computing is the company’s chief emerging threat, as Amazon.com Inc. ’s Amazon Web Services division and others take market share from IBM’s software, services and hardware businesses.
Chief Executive Ginni Rometty’s solution to this predicament has been a grand corporate reinvention. She sold IBM’s Intel -based server businesses to Lenovo Group Ltd. and paid Globalfoundries Inc. to take over IBM’s chip-making business.
The divestitures allowed Ms. Rometty to double down on new lines of business including the company’s own Bluemix cloud computing services and its Watson artificial intelligence software.
On Tuesday, IBM said the complexity of cloud computing helped boost by 40% the number of contracts the company signed in 2015 that were more than $100 million each. Total cloud revenue, which includes hardware and professional services revenue, jumped to $10 billion for the year, up 43%.
With overall sales in decline, however, investors are wondering when this painful transition will bottom out and IBM’s new lines of business will start to generate revenue.
The cloud figures show that IBM is making progress, but they aren’t yet big enough to offset the declines in IBM’s hardware, software and services business, said Mark Moskowitz, an analyst with Barclays PLC.
“Until we see the day when they can stop the damage…it doesn’t matter what they say about Watson or Bluemix or other types of buzzwords,” Mr. Moskowitz said.
About two-thirds of IBM’s sales take place outside of the U.S., so the strong U.S. dollar has been a continuing drag on the company’s results. Fourth-quarter revenue was down 2% when adjusting for currency fluctuations, the company said.
Weakness in Russia and China drove revenues down in those regions—but IBM’s take on China is rosier than that of Intel Corp., which last week warned of lower PC sales in that country.
“I don’t think we’re seeing anything different in China than what we’ve seen all year,” Mr. Schroeter said.
Overall, IBM posted earnings of $4.46 billion, or $4.59 a share, compared with $5.48 billion, or $5.51 a share, a year earlier. On an operating basis, the company posted earnings of $4.84 a share, above analysts’ expectations of $4.81 a share.
Global technology segment revenue declined 7.1% to $8.13 billion. Software segment revenue dropped 11% to $6.77 billion. Systems hardware revenue fell 1.4% to $2.37 billion, while global business services revenue decreased 9.9% to $4.3 billion.