NEW YORK: International Business Machines Corp.’s customers are moving away from its traditional servers, software and services faster than they are buying into its vision of a world where hospitals use its AI to help diagnose patients and software is delivered as a service over the Internet.
That mismatch led to the 104-year-old technology giant reporting on Monday lower quarterly revenue for the 14th straight quarter. For its quarter ended Sept. 20, revenue fell a greater-than-expected 14% to $19.29 billion. IBM blamed the drop in part on a stronger U.S. dollar, which made its products more expensive overseas, and because last year’s figures included revenue from its former Intel-based server business, which was sold.
For the fiscal year, IBM expects earnings per share of between $14.75 and $15.75, down from the previous guidance of between $15.75 and $16.50 share.
The revenue shortfall and a weaker earnings outlook helped knock its stock down 5%, or $7.42, to $141.86 in after-hours trading on Monday. IBM released results for the quarter after the end of regular trading.
The challenges before IBM are similar to those facing competitors Hewlett-Packard Co., Oracle Corp. and Dell Inc., the latter of which last week disclosed a proposed $67 billion merger with EMC Corp. Corporate buyers increasingly are turning to low-cost hardware and inexpensive cloud computing services delivered via the Internet.
IBM’s customers “have complex environments and many are asking us to help them navigate that complex environment,” said Martin Schroeter, IBM’s chief financial officer in an interview. “That takes time.”
The Armonk, N.Y., computer maker is betting its future on a set of emerging cloud, security, and data analytics businesses that Chief Executive Virginia Rometty calls the company’s “strategic imperatives.” During its most-recent quarter, revenue from these strategic imperatives grew by 17%, down slightly from the previous quarter’s 20% growth rate.
These initiatives accounted for 27 percent of IBM’s total revenue in 2014, Mr. Schroeter said, calling them “a pretty substantial part of the business.”
Earlier this month, IBM introduced its Cognitive Business Solutions unit, which will employ 2,000 analytics experts trained on the company’s artificial intelligence and machine learning products. They will work out of IBM’s Global Business Services Group, which has seen revenue declines every quarter since 2013 and including the most recent quarter, when revenues dropped 13.1% to $4.2 billion.
“We’re going to continue to drive that transformation, but we’re not as far along as we would have thought,” Mr. Schroeter said.
The company’s customers are beginning what industry analysts believe will be a large-scale migration away from software installed and run from their own data centers to the cloud, where software and servers are managed by companies such as IBM. The market for these so-called public cloud services is expected to hit $144.6 billion worldwide by 2019, estimates research firm International Data Corp. That is up from $57.8 billion in 2014. “Ninety percent of new software that’s coming out today is built for delivery on the public cloud,” said Crawford Del Prete, IDC’s chief research officer. “This software is key harbinger of whether people are using IBM to meet their needs,” he said.
IBM says that shift is happening. Its cloud computing business has generated $9.4 billion in revenue over the past 12 months, boosting sales of everything from the company’s mainframe computers to its services offerings. But growth in cloud computing isn’t yet making up for the company’s overall revenue declines.
IBM’s problem is that anything less than very rapid growth in the cloud, indicates that IBM is losing ground to rivals, say analysts.
“They’ve been talking about their growth businesses and how they’ve been growing at 20% or 30%, but the important thing is moving the needle for the company overall, because some of those solutions are effectively cannibalizing their old businesses,” said Toni Sacconaghi, an analyst with financial services firm Sanford C. Bernstein & Co. He also called the company’s lowered outlook “an incremental step down.”
IBM’s adjusted earnings per share for the quarter were $3.34, ahead of the $3.30 expected, on average, by analysts surveyed by Thomson Reuters. But its revenues were more than $300 million short of the $19.6 billion that analysts had expected.
