IBM's Drop in Revenue Drags Stock Lower

By Jay Greene

Investors drove shares of International Business Machines Corp. lower Wednesday after the company, just three quarters removed from a a nearly six-year string of shrinking revenue, reported a drop in its top line again.

Shares sank more than 7% in morning trading to $134.95, shaving about 70 points off the Dow Jones Industrial Average. The drop erased IBM's 2.8% gain Tuesday and then some, and that level would be the stock's lowest close of the year. The stock is down more than 11% year to date.

Shortly after the closing bell, IBM reported adjusted profit that topped Wall Street's forecast. Its 2.1% slide in revenue from a year ago, though, served as a reminder of the company's yearslong struggle to ditch its legacy image as a computer maker and refocus on fast-growing businesses such as cloud computing and services driven by artificial intelligence.

For years, Chief Executive Ginni Rometty preached patience as the company worked through its turnaround. IBM finally achieved seemed to get there when in January it reported higher revenue for the first time in 23 quarters and signaled more growth ahead.

Tuesday's report showed there is more work to be done. "Another typical IBM quarter," Stifel Financial Corp. analyst David Grossman wrote in a research note, with some good and some not-so-good results. Revenue, he said, was in line with the company's flat expectations, while services continued to improve and software was weaker than expected.

Overall, IBM reported revenue fell to $18.76 billion, primarily from declining sales in its Cognitive Solutions segment, which includes services tied to its Watson supercomputer and artificial intelligence. IBM finance chief James Kavanaugh in an interview specifically pointed to an 8% drop in its transaction-processing software business, which he expects will rebound in the current quarter.

The report also showed IBM again got less than half its quarterly revenue from a closely watched group it calls strategic imperatives, which includes cloud computing, data analytics and other faster-growing businesses. Three months ago, the company reported that for the first time it generated more than half of its revenue from strategic imperatives.

Three years ago, IBM said it expected those businesses to generate $40 billion in revenue this year, a target Mr. Kavanaugh said those businesses are on track to meet.

Wedbush analyst Moshe Katri said in a note Tuesday that IBM has yet to show consistent growth in such strategic areas.

Profit fell 1.2% to $2.69 billion. Excluding some acquisition-related and retirement-benefit charges, IBM posted earnings of $3.42 a share. Analysts expected adjusted profit of $3.40 a share.

Mr. Kavanaugh sought to dispel concerns on the company's Monday call with analysts, citing IBM's expanding margins in its service businesses as well as the long-term growth of its strategic imperatives. IBM maintained its expectation that full-year profits would hit at least $11.60 a share.

Despite the IBM stock drop, some investors aren't ready to bail just because of a one-quarter setback.

The earnings report "doesn't change our position on IBM," said Charles Robinson, founder and investment chief at Robinson Value Management Ltd., which in June invested about 3% of its roughly $90 million equity portfolio in the company. "IBM is not going to light the world on fire, it's not going to become the next Apple, but they have solid businesses that are stable and improving."

Sarah E. Needleman contributed to this article.

(END) Dow Jones Newswires

October 17, 2018 11:31 ET (15:31 GMT)

International Business M... (NYSE:IBM)
Historical Stock Chart
From Mar 2024 to Apr 2024