Earnings top estimates, but IT, mainframe divisions struggle
By Asa Fitch
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 18, 2019).
International Business Machines Corp. said revenue fell for its
fourth straight quarter as it struggles to retool its business for
the modern computing age, although Big Blue's profit grew more than
Wall Street had projected.
Revenue fell 4.2% from a year earlier to $19.16 billion. Profit
rose 3.9% to $2.5 billion, as the company worked to scale back its
exposure to businesses with smaller profit margins.
IBM has trailed Microsoft Corp. and Amazon.com Inc. as customers
race to do more of their computing in the cloud -- online services
that free companies from the need to buy and maintain their own
systems. As competitors report consistently strong revenue growth,
buoyed by sales of their cloud services, IBM has absorbed a string
of declines.
While IBM, led by Chief Executive Ginni Rometty, says its cloud
business is growing -- cloud revenue climbed by 5% in the second
quarter -- it is far behind the 41% annual cloud revenue growth
Microsoft saw in its latest quarter.
Meanwhile, other parts of IBM's business are in a gradual
decline. Revenue in the company's IT services division fell by 6.7%
year-over-year in the second quarter as the company lost sales from
lower-margin equipment it is transitioning away from.
The division that houses IBM's mainframe business also fell
almost 20%, although it faced a tough comparison to last year, when
the release of a new generation of those computers buoyed
sales.
Ms. Rometty is now betting on IBM's $34 billion acquisition of
open-source software giant Red Hat Inc. to seed a revenue rebound
after earlier cloud deals like the $2 billion acquisition of
Dallas-based SoftLayer failed to vault the company over the
competition. The Red Hat deal, the biggest in IBM's history, closed
earlier this month.
"That Red Hat acquisition will change the dynamics of our growth
profile, and it will change the dynamics of our cloud growth
profile overall," Chief Financial Officer James Kavanaugh said in
an interview. The deal would boost revenue by two percentage points
annually over the next five years, he said.
IBM expects to update financial projections in connection with
the Red Hat deal Aug. 2; the acquired company's performance wasn't
factored into IBM's second-quarter numbers.
While second-quarter revenue was in line with analysts'
expectations, earnings on an adjusted basis of $3.17 a share beat
expectations from analysts polled by FactSet.
Mr. Kavanaugh said IBM made $575 million from long-planned asset
sales in the quarter. But costs including a legal ruling against
IBM and payouts associated with a round of layoffs mostly outside
the U.S. at the end of June ate up most of those gains, he
said.
Shares moved down about 1% after hours to $143. The stock
initially showed gains following the earnings release.
IBM executives point to bright spots in the growth of cloud
services and tout the future of its artificial intelligence
business. The company wants to be at the center of companies
increasingly using AI to run their operations.
Tuesday, IBM said it landed a multibillion deal with AT&T
Inc. where it would help the telecommunications giant shift
business-service applications to IBM's cloud.
But Red Hat had already been an AT&T partner, and it wasn't
clear whether IBM's acquisition played any role in inking that
deal, said Toni Sacconaghi, an analyst at Bernstein Research.
"The belief is that owning Red Hat and going to market more
aggressively with it" will help IBM land more deals to provide
services to companies or help them move to the hybrid cloud, he
said. "That is the theory of the deal. The proof will be in the
execution."
Ms. Rometty took the helm in early 2012, at a time when IBM was
under pressure to meet a tough earnings-per-share target set by her
predecessor, Sam Palmisano. The company bought back billions of
dollars worth of shares and sold off underperforming assets in its
bid to meet that goal, but Ms. Rometty ultimately scrapped the
program in 2014 as it became clearer that the company needed to
invest in a more radical transition to stay competitive.
IBM had raked in cash from long-term deals with big companies to
supply them with hulking mainframe computers, plus IT support and
consulting to go along with them. The transition to cloud computing
meant companies needed less hardware, and could pay for only the
computing power they needed.
IBM's revenue started declining from almost the start of Ms.
Rometty's tenure at the helm, and fell year-over-year for 22
straight quarters. The company appeared to have turned a corner
when it posted growing revenue for three quarters starting in late
2017, but that rise was due largely to sales of a new generation of
mainframes, and it proved temporary. The revenue declines started
again in 2018, and have persisted since.
The company is now trying to revive revenues and distinguish
itself from the competition by focusing on the so-called hybrid
cloud, a model where companies do some of their computing in the
cloud but keep their most sensitive data in-house.
The hope is that the acquisition of Red Hat, which sells support
for a version of the open-source Linux operating system, will boost
IBM in the hybrid cloud arena because Red Hat software is at the
core of many customers' IT infrastructure.
Write to Asa Fitch at asa.fitch@wsj.com
(END) Dow Jones Newswires
July 18, 2019 02:47 ET (06:47 GMT)
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