IBM Sales Top Estimates as Rometty Moves Toward Profit Goals

Jul 17, 2014 5:13 pm ET

(Updates with emerging markets revenue in eighth paragraph.)

July 17 (Bloomberg) -- International Business Machines Corp.’s second-quarter sales topped analysts’ estimates, getting Chief Executive Officer Ginni Rometty closer to her profit goals.

While revenue fell 2 percent from a year earlier to $24.4 billion -- the ninth straight quarterly drop -- declines for products like mainframe servers and markets such as Brazil and China were less severe than earlier this year, IBM said today in a statement. The result surpassed the $24.1 billion that analysts projected on average, according to data compiled by Bloomberg. Adjusted earnings rose to $4.32 a share, 1 cent higher than analysts’ estimates compiled by Bloomberg.

Rometty is banking on a strong second half of the year to hit her targets for the company’s performance even as IBM adapts to an industrywide shift to cloud computing, an area that expanded 50 percent in the first six months of the year from the same period in 2013. The company reiterated its projection for 2014 adjusted earnings of at least $18 a share.

IBM is contending with technology customers that increasingly seek to store data and software on cloud-computing networks, rather than on site. That’s limited clients’ need for IBM’s servers and mainframes, making it more difficult to reach profit targets. The company had said before today that it expected mainframe sales to improve into next year.

IBM aims to reach $20 a share in adjusted earnings by 2015, up from $11.67 in 2010 -- a pledge instated by former Chief Executive Officer Sam Palmisano and sustained by Rometty, who succeeded him in 2012.

Shares of Armonk, New York-based IBM fell 1.4 percent in late trading.

Profit Goal

To meet this year’s projections, Chief Financial Officer Martin Schroeter said in April that IBM would be 38 percent toward its profit goal by the end of the second quarter. That implied second-quarter earnings this year of $4.21 to $4.39 a share, compared with the $4.32 a share reported today.

Revenue from emerging markets slid 7 percent in the second quarter, compared to an 11 percent fall in the three months prior. Sales to Brazil, Russia, India and China also pared losses, declining 2 percent, compared with an 11 percent drop last quarter.

Chinese Market

The company has faced difficulties in the Chinese market as tensions over cyberhacking have risen between China and the U.S. The Chinese government is reviewing whether domestic banks’ reliance on high-end servers from IBM compromises the nation’s financial security, people familiar with the matter said in May. IBM said then that it wasn’t aware of any government policy recommending against use of its servers.

Sales of mainframe servers, the workhorse machines corporate customers have used for decades to run their crucial computing tasks, decreased 1 percent -- an improvement from the 40 percent decline in the first quarter. IBM had said it expected those sales to improve because more customers were preparing to upgrade their mainframes.

As Rometty tries to navigate the company through the industry’s changes, she has shifted IBM’s own focus to cloud services, along with data analytics, in which the company helps clients mine the digital information they collect to identify trends. Rometty has also tried to offload less profitable businesses -- like the low-end server unit that Lenovo Group Ltd. agreed to buy for $2.3 billion, pending a U.S. national- security review.

Watson Technology

In a deal unveiled this week, IBM will help develop more than 100 mobile-centric applications for businesses catered to Apple Inc.’s iPhones and iPads to help workers do more with the devices than check e-mail or calendars. The companies foresee corporate customers increasingly using handheld devices for daily workplace tasks like supply chain management and human resources functions.

Separately, IBM is spending more than $1 billion to create a new group around its Watson technology, which lets customers use plain English to analyze large troves of data. To remake its cloud business, Rometty bought provider SoftLayer Technologies Inc. in 2013 for $2 billion and this year committed an additional $1.2 billion to bolster its data centers and offerings.

“Their success is going to be tied to the cloud over the next five to 10 years,” said Daniel Ives, an analyst at FBR Capital Markets. “It’s more of a strategic focus of the company.”

Cloud Growth

Cloud offerings delivered as a service are now at an annual run rate of $2.8 billion, compared with $2.3 billion as of the first quarter. That’s still a fraction of IBM’s total $100 billion in revenue last year.

As it reshapes itself, IBM will still have to rely on its older global business services and software units, which together make up about three-quarters of sales. To boost earnings in the meantime, Rometty has also sold debt to fund share buybacks, laid off workers and slashed the company’s tax rate.

IBM ended the quarter with $9.7 billion in cash on hand, even with the end of March, after spending $1.1 billion on dividends and $3.7 billion on share buybacks.

Net income climbed to $4.1 billion, or $4.12 a share, from $3.2 billion, or $2.91 a share, a year earlier.