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IBM Woes Point to a Fresh Overhaul

More legacy bloodshed. Aivars Lode avantce

IBM Woes Point to a Fresh Overhaul

CEO Disappointed With Results; Revenue Declines for 10th Straight Quarter

By Don Clark

October 20, 2014

International Business Machines Corp. , two decades after successfully shifting its focus to software and computer services from hardware, is showing signs of needing another overhaul.
On Monday, the computing and software giant abandoned a longtime earnings target, reported sharply lower third-quarter profit on a surprising 4% downturn in sales, and said it would divest semiconductor operations that underpin much of its remaining computer business.
The downbeat earnings and revenue picture sent IBM shares 7% lower and added to jitters about demand for high-tech products and services following weak results at heavyweights Oracle Corp. ,Hewlett-Packard Co. , and Cisco Systems Inc.
“Our results this quarter were disappointing,” IBM Chief ExecutiveVirginia Rometty said after disclosing the weakness in services and software and a large write-down to divest the semiconductor unit. “We’ve got to reinvent ourself like we’ve done in prior generations.”
It was IBM’s 10th consecutive quarter of flat or declining sales. The results stood in contrast toApple Inc., which on Monday posted a 13% profit increase on strong September sales of its larger-screen iPhones.
The Armonk, N.Y., technology giant said it no longer expects to earn at least $20 a share next year, a forecast it has maintained for five years and under two chief executives. IBM didn’t offer an estimate for next year, saying it would offer a new outlook in January.
Its shares fell to a three-year intraday low before recovering a bit to finish down $12.95 at $169.19.
Ms. Rometty and other executives insist the focus on services remains the right one, saying IBM must make its software and services offerings more competitive.
“We continue to evolve services, the same way we continue to evolve what our clients want in software,” said Martin Schroeter, IBM’s chief financial officer, in an interview.
Analysts and customers say IBM’s cloud push and efforts to use its depth and breadth to sell big projects that can help change a customer’s business is running out of runway.
The massive overhauls are giving way to lower-cost services built in the “cloud,” using data centers assembled for that approach Inc., Google Inc. and others.
Behrooz Najafi, vice president of information technology at Questcor Pharmaceuticals Inc., said he hasn’t used any IBM technology in quite a while. He said IBM is an “old technology company” that is going through a rapid move away from its fading hardware and manufacturing businesses and into cloud computing and software.
IBM has raised its cloud-services profile by acquiring SoftLayer for $2 billion in 2013 and announcing plans to spend $1.2 billion on additional cloud data centers.
Analysts say the effort has been late and impinged on IBM’s efforts to sell its pricier infrastructure services.
In addition to cloud computing, the company has sought to make up for slow growth in services by investing in two promising areas.
One is deriving insights from data generated by customer operations, so-called big-data analytics. The company has invested $16 billion in analytics acquisitions since 2005, and in September it rolled out Watson Analytics, a suite of data-analysis services aimed at small to medium-size businesses.
Another area where IBM is trying to create momentum is artificial intelligence.
Its Watson artificial-intelligence platform made a big splash by winning the television game show Jeopardy in 2011, yet efforts to commercialize that technology have been slow to bear fruit.
IBM has sought to improve profitability by exiting low-margin businesses, such as the recent sale of its commodity server business to Lenovo Group Ltd.
Transferring its semiconductor unit to Globalfoundries Inc. also would reduce the expenses associated with staying abreast of new chip production and design technologies.
IBM agreed to pay the semiconductor company $1.5 billion to take over its chip manufacturing and employees. Under the agreement, Globalfoundries will continue to produce the processors used in IBM systems. IBM also took a $4.7 billion charge to earnings for the divestiture.
IBM’s hopes for a turnaround was based on the assumption that customers would pay it to run their computing operations and help exploit business software. It was a strategy that has served IBM well for nearly two decades.
Ms. Rometty, who became CEO in January 2012, has tried to modernize the company’s services offerings to emphasize faster-growing parts of the market.The move to services, starting in 1993, “was a great move at the time, it saved IBM,” says Erik Gordon, professor at the University of Michigan’s Ross School of Business. But he makes a play on the title of a book, “Who Says Elephants Can’t Dance?” by former IBM CEO Louis Gerstner Jr. , about its 1990s-era transformation. “It’s time for the elephant to learn a new dance,” Mr. Gordon says.
She also dispensed with an unprofitable part of the business, running call centers on behalf of companies.
“IBM has great assets in terms of experience in complex enterprises, but the question is: How quickly can they move within the next year to get well positioned? Amazon has everybody on their heels,” said Vince Kellen, chief information technology officer at the University of Kentucky.
The challenges are apparent in its latest results: IBM posted a 2.9% decline in revenue from services.
While cloud-based revenues grew, the company cited a slowdown in signing contracts to manage large installations of business software, a market with fierce price competition.
Total revenue from IBM’s computers and semiconductor operations fell 15% in the third quarter.
Revenues from mainframes were off 35%, while other computer equipment fell 12%, both over a year earlier.
In all, IBM reported net income for the quarter ended Sept. 30 of $18 million, or 2 cents a share, compared with profit in the year-earlier quarter of $4.04 billion, or $3.68 a share.
Revenue fell to $22.4 billion from $23.3 billion a year earlier.
IBM said profit excluding items such as acquisition-related charges and retirement-related costs came to $3.68 a share. Analysts had expected earnings on that basis of $4.31 on revenue of $23.37 billion.

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