Weak Results Batter IBM amid Shift in Strategy ; Cloud Computing Is Focus as Company Moves Away from Old-Line Products

By Lohr, Steve | International New York Times, October 22, 2014 | Go to article overview

Weak Results Batter IBM amid Shift in Strategy ; Cloud Computing Is Focus as Company Moves Away from Old-Line Products


Lohr, Steve, International New York Times


The chief executive called the results disappointing as the company said it would pay $1.5 billion to shed its chip-making unit.

After IBM reported surprisingly weak quarterly profits and sales, Virginia M. Rometty did something most unusual for an IBM chief executive. She joined the conference call with analysts and forcefully made the case for investing heavily in new fields that promise growth in the future, despite a near-term financial setback.

"We are reinventing and we are managing this company for the long term," Ms. Rometty told the Wall Street analysts on Monday morning. She acknowledged that third-quarter results were "disappointing," and she underlined the need to pick up the corporate pace in the midst of "unprecedented change" in the technology industry.

But Ms. Rometty insisted that IBM's "very bold moves" since she became chief executive nearly two years ago -- multibillion-dollar spending programs for data analysis software and skills, cloud computing and Watson artificial intelligence technology -- were the right ones. "The strategy is correct," she said. "Now it's our speed of execution that needs to improve."

IBM, like the entire tech industry, is going through a significant transition, which is a threat as well as an opportunity. It's a point that Ms. Rometty has made recently; in an interview earlier this year, she said 2014 would be a "rocky time" given the challenges.

But IBM's third-quarter performance brought even more attention to its particular financial struggles, as new businesses that are growing are not yet large enough to offset the weakness in its traditional hardware, software and services lines.

The quarterly results came in well below the forecasts of Wall Street analysts, and they caught IBM executives off-guard as well. In the conference call, Martin Schroeter, IBM's chief financial officer, conceded that the industry was shifting "faster than we had planned."

As a result, IBM said it was abandoning its financial target for 2015 of delivering earnings per share of $20 or more.

The company's stock price dropped more than 7 percent, down $12.95, to close at $169.10 a share.

The industry transition that is buffeting IBM includes the move to deliver software as a service from remote, or cloud, data centers and the use of new kinds of less expensive software and hardware to store and analyze huge amounts of data. These are growth businesses for IBM, but they also are a shift away from the traditional software and services businesses, which have been IBM's lucrative mainstay.

Steven Milunovich, an analyst at UBS, estimates that traditional hardware, software and services products make up two-thirds of IBM's revenue. "IBM is in the midst of a multiyear transition that is unavoidable," Mr. Milunovich said. "But when you have this much change, it is very tough on legacy businesses."

For years, IBM has been moving away from some of its old-line products, especially hardware operations with lower profit margins, notably selling off its disk drive and personal computer divisions years ago. It took another such step on Monday.

IBM announced that it was shedding its chip-making operations in a deal with Globalfoundries. As part of the transaction, IBM took a $4.7 billion pretax charge against its third-quarter earnings. The charge includes writing down the value of the assets and a $1.5 billion cash payment to Global-foundries, a large contract chip producer, based in Santa Clara, Calif.

With the charge for the chip sell-off, IBM reported net income of $18 million, or 2 cents a share. …

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