The transition to the cloud is not happening fast enough for slow-moving IBM, which today reported disappointing third quarter results: Revenue of $22.4 billion declined 4 percent year over year and fell short of the Wall Street consensus estimate of $23.37 billion, while per-share earnings of $3.68 missed the consensus by 64 cents.
With the second half of this year now coming in weaker than expected, the company’s outlook has gotten more hazy, so management pulled its 2015 earnings forecast of $20 a share, saying it would provide an updated figure in January.
IBM’s latest numbers have not been well received on Wall Street: the stock today is down 7 percent, earlier hitting a new 52-week low at $166.71.
For the quarter, IBM’s global services revenue of $13.7 billion (61 percent of total revenue) was off 3 percent, while software revenue declined 2 percent to $5.7 billion and hardware revenue dropped 15 percent to $2.4 billion. “We saw a marked slowdown in September in client buying behavior,” said CEO Ginni Rometty.
Moving Slowly to the Cloud
Customer budgets are increasingly moving to the cloud (and away from standalone hardware and on-premise software), while IBM at this point is not positioned well enough to fully benefit from this shift in spending.
From a geographical perspective, weakness in the third quarter was seen across the board, with revenue in the important Americas region (45 percent of total revenue) off 2 percent. Revenue from the Europe, Middle East and Africa region (32 percent of revenue) declined 2 percent, while Asia Pacific revenue dropped 9 percent. In the developing segment (Brazil, Russia, India and China), revenue fell 7 percent.
The company’s one bright spot, cloud delivered as a service, grew 80 percent year to date, ending the September quarter on an annual revenue run rate of $3.1 billion (up from $2.8 billion exiting the second quarter), but unfortunately this is still a small piece of IBM’s overall business.
IBM’s cloud growth right now can’t make up for the sharp deceleration in the massive services side of the business. In the third quarter, services backlog declined 7 percent year over year.
Promises to Go Faster
Following the shortfall, Rometty promised to accelerate IBM’s transformation to focus more on its so-called strategic growth areas — cloud, data analytics, security, social and mobile. So far this year, the company’s security revenue is up 20 percent and mobile revenue has more than doubled.
As part of its move to the cloud, the company continues to exit non-strategic segments that have been dragging down its performance. IBM is actually paying chipmaker GlobalFoundries $1.5 billion in cash to take the unprofitable OEM semiconductor business off its hands. On Oct. 1, Lenovo Group bought IBM’s low-end server business for $2.1 billion.
In the third quarter, IBM generated $2.2 billion in free cash flow and returned $2.8 billion to shareholders via a combination of dividends and buybacks. With $9.6 billion in cash on hand, the company needs to do a better job balancing its outlays, spending more on growth-focused cloud acquisitions.