IBM Shares Slide After Revenue Drop Renews Concerns -- Update
October 17 2018 - 3:26PM
Dow Jones News
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 afternoon trading to $134.70,
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.
"It was clearly a disappointing quarter," said John Conti, a
partner at SeaBridge Investment Advisors LLC, which is an investor
in IBM. Though Mr. Conti said the company's turnaround has been
going more slowly than he expected, he believes it will happen. "Of
course, we like to see short-term results, but they're taking the
right steps for the future."
For years, Chief Executive Ginni Rometty preached patience as
the company worked through its turnaround. IBM finally 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.
Write to Jay Greene at Jay.Greene@wsj.com
(END) Dow Jones Newswires
October 17, 2018 15:11 ET (19:11 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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