This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 19, 2017).
Continue Reading Below
International Business Machines Corp. on Tuesday reported falling quarterly profit and sales, adding to doubts about Chief Executive Ginni Rometty's lengthy effort to reinvent the 106-year-old technology giant.
The 4.7% drop in second-quarter revenue, to $19.3 billion, marked the 21st consecutive quarter of declining sales at IBM. Profit margins also narrowed across all business units, including the divisions for its main cloud computing and Watson-artificial intelligence operations -- two areas Ms. Rometty is counting on to propel the company's turnaround. Profit fell 6.9% from a year earlier.
Ms. Rometty highlighted new features and clients for IBM's cloud services, the business of hosting and managing customers' computing operations in its data centers. "We strengthened our position as the enterprise cloud leader," she said in a press release. The company said cloud revenue rose 15% from a year earlier to $3.9 billion. But IBM includes in that tally sales from various divisions, and revenue slipped 5% in the technology services and cloud platforms segment, which is its largest.
Earnings results exceeded analysts' expectations. Still, revenue came in below forecasts, and shares in Big Blue slid more than 3% after-hours Tuesday, extending a roughly 8% drop this year through Tuesday's close. In contrast, the S&P 500's has gained nearly 9% during the same period.
IBM's legacy businesses selling hardware, software, and services for traditional corporate computing facilities have been slowing as companies embrace cloud computing. Ms. Rometty, who became CEO in January 2012, has placed big bets on markets IBM calls "strategic initiatives" -- including cloud computing as well as artificial intelligence and cybersecurity -- where it believes it can achieve faster growth and higher margins.
Continue Reading Below
The company has struggled to keep those new businesses growing at a pace that outweighs the decline in its old ones. Its revamp had seemed to gain momentum last year, with profit rising in the fourth quarter. But profit started dropping again in the first quarter, and the latest result puts pressure on Ms. Rometty to boost results in the second half of this year to make good on IBM's full-year forecast.
"The strategic imperative story is still one they're touting, but it has not led to an improvement in the overall revenue growth rate of the company," said analyst Toni Sacconaghi of Bernstein Research.
Martin Schroeter, chief financial officer, said IBM "finished the first half spot-on where we said we would. We positioned ourselves to have the second half that we're confident we'll deliver."
The company on Tuesday reiterated its annual forecast, calling for adjusted earnings -- which omit items including acquisition- and retirement-related charges -- of at least $13.80 a share and free cash flow to be flat relative to last year.
The Armonk, N.Y., computing giant said revenue in its strategic-initiative areas rose 7% in the quarter, down from 12% growth in the first quarter. The company said such revenue accounted for 43% of its total over the past 12 months. Mr. Schroeter said he expects a strategic-imperative growth rate between 10% and 11% for 2017 as new signings take effect and new hardware drives broader sales.
Revenue at the division that includes Watson services focused on the health care and finance markets fell 2.5% from last year's second quarter to $4.56 billion.
Profit margins have been eroding despite the growth in purportedly higher-margin businesses. Gross margins continued to narrow across all business units, though by less than in the first quarter.
Declining gross margins challenge the notion that IBM's investments in areas like artificial intelligence and cloud computing can pay off.
"The narrative is becoming tedious -- a lot of investment in next-gen tech with little revenue impact and with increasing dependence on cost take-outs or below-the-line items to manage EPS," wrote Mark Moskowitz of Barclays Bank PLC in recent note.
Ms. Rometty is now midway through her sixth year as CEO, and IBM's stock has fallen roughly 17% during her tenure. In May, she lost some support from one of IBM's most important backers, when Warren Buffett, chairman of Berkshire Hathaway Inc., who had been IBM's largest investor, revealed that he had sold about a third Berkshire's stake.
Ms. Rometty will turn 60 on July 29, the age at which her predecessors, Samuel Palmisano and Louis Gerstner, both retired.
However there are no signs she is planning to move on. An IBM spokesman noted that its board had awarded Ms. Rometty stock options that don't vest until 2019, and said that, while the 60-year-old retirement age has been a tradition of IBM CEOs, "it's not a rule, and there is no policy on age 60."
Write to Ted Greenwald at Ted.Greenwald@wsj.com
(END) Dow Jones Newswires
July 19, 2017 02:48 ET (06:48 GMT)