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Jan 21, 2021

IBM revenue misses estimates, showing continuing cloud struggles

Stan Wong discusses IBM

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International Business Machines Corp. shares fell the most in 10 months after the company reported a greater sales decline in the fourth quarter than analysts had expected, signaling Chief Executive Officer Arvind Krishna’s turnaround plan may take more time.

Sales fell 6.5 per cent to US$20.4 billion in the three months ended Dec. 31, the Armonk, New York-based company said Thursday in a statement. That was below the US$20.75 billion analysts had forecast, on average, and marked the 10th consecutive quarter with no year-over-year increase in revenue.

“This is a sequential change which seems to be notably below trend,” said Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co., on Thursday’s earnings call.

The shares fell 11 per cent Friday morning in New York to as low as US$117.40. It was the biggest intraday decline since March 16. The stock declined about 5 per cent over the past 12 months through the close of trading Thursday, lagging the 16 per cent gain in the S&P 500 during that time.

Last October, Krishna announced he would spin off IBM’s managed infrastructure services unit into a separate publicly traded company. The division, which is currently part of IBM’s Global Technology Services division, handles day-to-day infrastructure service operations, like managing client data centers and traditional information-technology support for installing, repairing and operating equipment.

While the unit accounts for about a quarter of IBM’s sales and staff, it has seen business shrink as customers embraced the shift to the cloud, and many clients delayed infrastructure upgrades during the pandemic. The spinoff is scheduled to be completed by end of 2021.

Revenue declined across IBM’s business segments in the fourth quarter. Cloud and Cognitive Software, IBM’s biggest unit, saw revenue decrease 4.5 per cent from a year earlier. That follows a 7 per cent gain in that unit in the third quarter. Total cloud revenue increased 10 per cent to US$7.5 billion.

That was the most revenue from cloud yet for IBM, but it was a slower pace of growth than the 19 per cent gain in the previous quarter. In Global Technology Services, revenue fell 5.5 per cent while sales from Global Business Services dropped 2.6 per cent. Systems, which includes hardware and operating systems software, saw sales decline 18 per cent.

IBM attributed the quarter’s disappointment to weaker software sales caused by business uncertainty during the pandemic. The company saw a significantly lower demand for transaction processing software used by banks, airlines and retail.

Krishna said the company’s actions to focus on cloud and artificial intelligence “will take hold,” and give him “confidence we can achieve revenue growth in 2021.” The company hasn’t given specific financial forecasts since it withdrew its annual projection for 2020 in April.

“It’s more or less a reflection of the difficult spot they’re in,” in trying to restructure the business, said Daniel Elman, an analyst at Nucleus Research.

IBM seeks to distinguish itself from its bigger rivals in cloud, such as Amazon.com Inc. and Microsoft Corp., by offering a hybrid model, which assists clients in storing and computing data across on-premises infrastructure, private cloud services and servers run by public providers. Krishna was the driving force behind IBM’s US$34 billion purchase of open source software provider Red Hat in 2018, the first step toward transitioning IBM into what it sees as a US$1 trillion hybrid-cloud market, and which now leads much of the company’s growth. Red Hat revenue increased 19 per cent in the fourth quarter to US$1.3 billion.

IBM continues to make acquisitions to bolster its cloud credentials. The company has made seven acquisitions focused on cloud and AI since October, Chief Financial Officer James Kavanaugh said in the statement, including Taos Mountain LLC, a firm that helps companies shift software and data online, and Instana, which manages cloud applications.

Fourth-quarter earnings excluding some costs were US$2.07 a share, beating the average analyst estimate of US$1.79. Gross margin was 52.5 per cent, 1.3 percentage points higher than analysts’ expected.