IBM Shares Slide After Revenue Drop Renews Concerns -- Update
October 17 2018 - 5:45PM
Dow Jones News
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)
Copyright (c) 2018 Dow Jones & Company, Inc.
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