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IBM Struggles to Jump-Start Its Turnaround

Posted by hkarner - 18. April 2019

Date: 17-04-2019
Source: The Wall Street Journal

Computing giant posts third consecutive quarter of declines, touts growth in cloud-computing business

IBM said its cloud businesses grew by 10% in the past 12 months.

International Business Machines Corp. reported a third consecutive quarter of declining revenue, further clouding Chief Executive Ginni Rometty’s yearslong quest to revitalize the computing giant.

Under Ms. Rometty, who has been at the helm since 2012, IBM has poured resources into its cloud-computing business and new technologies such as artificial intelligence, aiming to reorient Big Blue in a world where traditional growth engines like equipment sales and services haven’t been growing as rapidly.
IBM said its cloud businesses grew by 10% in the past 12 months.

For a brief spell last year, it appeared as though IBM had turned a corner, reporting successive quarters of overall revenue growth—however small.

That changed in the middle of 2018, as Wall Street analysts and investors watched revenue tip back under.

IBM shares fell 2.7% to $141.21 in extended trading after closing Tuesday less than 1% higher.

Several of IBM’s lines of business, including cloud services and information-technology-support services declined.

IBM also had faced a tough comparison to last year’s first quarter, when a new generation of industrial-strength mainframe computers helped drive sales. That segment dropped 11% in the latest quarter.

In a conference call with analysts Tuesday, IBM Chief Financial Officer James Kavanaugh blamed the most-recent revenue decline in part on clients in the Asia-Pacific region delaying buying decisions.

“The team’s on the field, and we’re focused on closing” those transactions, Mr. Kavanaugh said, also affirming the company’s annual guidance.

Net income fell 5.2% to $1.59 billion. Adjusted profit, which excludes some items such as acquisition costs, came to $2.25 a share. Analysts had expected $2.22.

Despite the drop in net profit and revenue, IBM touted the growth in its cloud-computing revenue, which reached $19.5 billion for the past 12 months. Mr. Kavanaugh also pointed to IBM’s expanding margins as the company pursues faster-growing businesses that cost less to run.

While growth was flat or declined in all of IBM’s main reported lines of business, the company bumped up its overall profit margin by a percentage point to 44.2%.

Asked if job cuts were planned as IBM struggles to ramp up business, Mr. Kavanaugh said the company would “take actions to address the stranded costs and structures” that would eat the majority of a projected $500 million to $700 million gain from planned divestitures.

IBM, Mr. Kavanaugh said, expects to close most—if not all—planned divestitures in the second quarter.

Once an icon of American ingenuity, IBM has struggled to compete in the modern computing era as the rise of cloud giants like Amazon.com Inc. and Alphabet Inc.’s Google have challenged an old model where big companies handled their critical computing needs largely in-house. IBM sees promise in the so-called hybrid cloud—the idea that companies will increasingly use a combination of cloud services and their own equipment to accomplish those tasks—and aims to grow that business.

IBM’s cloud segment may not be growing as fast as some of Amazon’s or Microsoft ’s cloud services, Mr. Kavanaugh said, but the company is keeping pace with its target for midteen growth in the hybrid cloud, a rate he said can allow it to take share in that arena.

Ms. Rometty is aiming to bolster IBM’s hybrid-cloud strategy through IBM’s acquisition of Red Hat Inc., an open-source software and services company that helps businesses streamline their computing strategies as they grow. That deal, valued at around $33 billion, is IBM’s largest-ever acquisition and is expected to close in the second half of the year. IBM intends to suspend its share repurchases in 2020 and 2021 to pay down debt.

IBM’s revenue had fallen virtually every quarter since Ms. Rometty took over, up until the last quarter of 2017, when it suddenly rose again. The company saw further revenue rises in the first half of last year, but that turnaround proved short-lived: Revenue declined again in the last two quarters of 2018.

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