IBM Has Another Revenue Drop During Its Transition

By Ted Greenwald Features Dow Jones Newswires

International Business Machines Corp. reported declines in quarterly profit and sales in the third quarter, a sign the company's drawn-out transformation still has a way to go.

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Revenue dropped 0.4% to $19.15 billion, marking its 22nd consecutive quarter of year-over-year declines.

IBM is trying to transition from older, shrinking businesses, such as building and maintaining technology on customers' premises, to higher-growth operations like delivering pay-as-you-go services over the internet. It has placed big bets on emerging technologies, such as artificial intelligence and blockchain, which is the networked ledger at the heart of bitcoin digital currency.

The transition initiated five years ago by Chief Executive Ginni Rometty, though, has been slow.

Newer businesses such as cloud computing and the Watson artificial intelligence platform, called strategic imperatives by IBM, grew 10% over the past 12 months, accounting for 45% of the company's revenue, the company said. Cloud revenue jumped 25% in the past 12 months.

In all, IBM reported a profit of $2.73 billion, or $2.92 per share, compared with earnings of $2.85 billion, or $2.98 per share a year earlier.

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The Armonk, N.Y., computing giant reported per-share earnings of $3.30 on an adjusted basis, omitting such items as acquisition- and retirement-related charges. Analysts had expected $3.28 a share, on $18.6 billion in revenue, according to a survey by Thomson Reuters.

Shares in the 106-year-old company rose 3% to $151 in after-hours trading, after closing down 0.2% on Tuesday. The stock had fallen 12% this year, compared with the S&P 500's gain of 14%.

IBM reiterated its annual forecast, calling for adjusted per-share earnings of at least $13.80.

Write to Ted Greenwald at Ted.Greenwald@wsj.com

International Business Machines Corp. had gains in its hardware and artificial-intelligence divisions in the third quarter but over all profit and sales declined, a sign the company's drawn-out transformation still has a way to go.

Revenue was down 0.4% from a year earlier to $19.15 billion, a minor slide but enough to make it the 22nd consecutive quarter of year-over-year declines.

Still, revenue from the hardware division, which rolled out new mainframe computers over the summer, marked its first gain from a year earlier since 2015.

Profit fell 4.5% to $2.73 billion. Margins narrowed over all and in most business units, though progressively less since the beginning of the year -- a hopeful sign of stabilization.

IBM's results were buoyed by currency exchange rates that, according to David Grossman of Stifel, worked in the company's favor for the first time since 2011. IBM makes roughly half its sales outside the U.S.

"We said we'd have a better second half than first, and we did a bit better on the revenue line," IBM Chief Financial Officer Martin Schroeter said in an interview. "We're well positioned to deliver exactly what we said in the fourth quarter."

Wall Street agreed, sending shares of Big Blue up nearly 5% in after-hours trading after finishing down a hair at $146.54 during the regular trading day. The stock had fallen 12% this year, compared with the S&P 500's gain of 14%.

IBM is trying to transition from older, shrinking businesses such as building and maintaining technology on customers' premises to higher-growth operations like delivering pay-as-you-go services over the internet.

The company has placed big bets on emerging technologies such as its Watson AI platform and blockchain, the networked ledger at the heart of digital currencies such as bitcoin.

The newer businesses IBM calls strategic imperatives, which include cloud computing and Watson-driven applications in health care and finance, grew 11% to $8.8 billion from a year earlier. Cloud revenue rose 20% to $4.1 billion from a year earlier.

Strategic imperatives are the crux of IBM's prospects for transformation. Those newer businesses accounted for 45% of total revenue in past 12 months, up 2 percentage points from a quarter ago, and are approaching the mark where they could push the company back to growth.

However, their growth rate has slowed in recent quarters, roughly matching the low double-digit rate at which older businesses have been declining, some analysts say, and raising questions about whether the transition Chief Executive Ginni Rometty initiated five years ago is stalling.

"The results were a bit better than expectations and certainly better than feared," said Toni Sacconaghi of Bernstein Research. "But the real fundamental question is: Is the relative strength driven by mainframes, which are highly cyclical, or is this the start of a broader turnaround?"

There are reasons for optimism, and some analysts believe the company is turning a corner, however slowly.

Josh Olson, an analyst with Edward Jones, noted IBM's healthy cash flow and "strong position in the global marketplace." If the company can better commercialize its innovations, it will return to growth over the next few years, he said before the earnings release.

IBM will launch new server chips in the coming quarter, and it recently introduced new mainframes, the refrigerator-size computers that drive transactions for large banks, insurers and retailers, that are expected to boost results further in the coming quarters.

The Armonk, N.Y., computing giant reported per-share earnings of $3.30 on an adjusted basis, omitting items such as acquisition- and retirement-related charges. Analysts had expected $3.28 a share on $18.6 billion in revenue, according to a survey by Thomson Reuters.

Write to Ted Greenwald at Ted.Greenwald@wsj.com

(END) Dow Jones Newswires

October 17, 2017 19:13 ET (23:13 GMT)