IBM Shares Slide After Revenue Drop Renews Concerns -- Update

By Jay Greene

A sharp drop in shares of International Business Machines Inc. accelerated into the close of trading Wednesday, a day after the company reported shrinking quarterly revenue that took some shine off its recent turnaround momentum.

Shares finished down 7.6% at $134.05, a decline that sliced 75 points off the Dow Jones Industrial Average and sent the stock to its lowest close in more than two and a half years. Shares are down more than 15% from a year ago.

IBM on Tuesday reported adjusted profit that topped Wall Street's forecast. Its 2.1% slide in revenue from a year ago 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 flat expectations, while services continued to improve and software was weaker than expected.

Overall, IBM 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. Finance chief James Kavanaugh in an interview Tuesday pointed to an 8% drop in IBM's 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 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 17:30 ET (21:30 GMT)

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