International Business Machines Corp (IBM, Financial) enters into 2015 on the back of another quarter of sharply reduced profits as earnings continued to slide across its segments. The company, which had earlier targeted a rise in its stock to at least $20 per share by 2015, has projected earnings in the range of $15.75-16.50 per share for the current year. The enduring negative trend is the result of IBM transitioning towards the adoption of Cloud technology, a phase that is plaguing several other technology businesses. With the Armonk, N.Y.-based technology giant foreseeing flat sales and a decline in revenue this year, market experts warn that the negative headwind would persist through the next couple of years.
Revenues Continue to Disappoint
IBM’s overall revenue for the fourth quarter of the last fiscal fell almost 12% to $24.11 billion, with the company’s full-year revenue also going down 5.7% year over year to $46.4 billion. While the company’s revenue from its worldwide business service segment fell 8.4% from 2014 figures to $4.35 billion, its technology services segment slid by 7.6% to $9.17 billion. At the same time, IBM’s earnings from systems and technology and software segments also logged a decline of 39% and 6.9% to $2.41billion and $7.58billion respectively. Reports show a decline of 6% from the same quarter a year ago in revenues from the technology giant’s key middleware offerings including Workforce Solutions, Tivoli, WebSphere, Information Management and Rational. However, its Software-as-a-Service products were up almost 50%.
With IBM having missed the targeted per share non-GAAP revenue in four out of the last eight quarters as well as overall revenue projections in a whopping 12 of the last 15 quarters, the company’s shares have witnessed a decline of over 19% through the last year. It is no wonder then that the IBM stock is listed amongst the worst performers as per the Dow Jones Industrial Average. Moreover, an earnings decline by 3% year over year to $7.58 bn in the last quarter of 2014, followed by a projected decline in adjusted revenue per share for 2015 has had investors worrying.
Transition to Cloud technology is a pan-industry struggle
IBM, which is still considered the largest global technology service business but no longer an innovations leader, has exited several of its low-margin businesses in the past with the aim of improving profitability. For instance, the company transferred its microelectronics division to Globalfoundries Inc. and sold its commodity server venture to Lenovo Group Ltd. (LNVGY, Financial) Further, IBM also divested its System X and customer care business process outsourcing venture.
In its current bid at reinvention, the company is transitioning to Cloud software and computing as well as Big Data analytics. The company’s revenue from cloud jumped 60% from a year ago quarter, with revenues from Cloud delivered as a service soaring 75% year on year. Concurrently, revenues from security offerings increased by over 19% from the year-ago quarter while revenue from business analytics grew 7% year on year. However, the new ventures have so far failed to deliver the results required to offset revenue loss resulting from the divestures as well as the expenditure involved in upgrading and developing new infrastructure. Consequently, acknowledging its faltering transition plan, the company had to withdraw its previously announced long-term plan targeting a $20 per share earnings for 2015. Following the announcement of its fourth quarter results, the company is also finding itself amid rumors of large-scale layoffs.
However, IBM is not alone in the current struggle to find a foothold in the novel Web-based technology industry. Other industry giants such as SAP (SAP, Financial), Oracle (ORCL, Financial), Cisco (CSCO, Financial) and HP (HPQ, Financial) also face significant headwinds as they adjust to the new business environment resulting from the growing popularity of Cloud-based technology and the expenditure involved in developing the required infrastructure for cloud-delivery. Although IBM has partnered with a number of industry giants such as Microsoft (MSFT, Financial) and Twitter (TWTR, Financial) for cloud-based solutions and Apple (AAPL, Financial) for expanding its consulting, services and software business in the enterprise marketplace, competition is expected to intensify in 2015.
Final thoughts
IBM’s developmental initiatives, including Cloud computing, social and mobile business and Big Data analytics, are a step in the right direction. The fourth quarter also saw the company securing a $350 million contract from the U.S. Department of Energy towards the creation of OpenPOWER technology-based super-computers for the future. Moreover, the company also signed an agreement with Suzhou PowerCore for the use of POWER architecture to develop and market processors for servers in the Chinese marketplace.
However, the company’s overall growth is being weighed down by its transition from being a primarily hardware business to a services and software business, a shift that spells a multifold increase in IBM’s capital expenditure. As IBM combats an enduring slowdown in sales of traditional software and sluggish IT spending, especially on data-center and on-premise hardware, experts recommend that investors hold on to their shares in the hope that after bottoming out in 2015 IBM would be in for a better run in 2016. The company itself expects to end 2015 with a higher margin, higher value business.
