Transition to cloud and mobile services hurts IBM’s earnings

By Eve Fan

IBM Corp.‘s stock plummeted by nearly 6 percent Tuesday after the company reported a 14 percent decline in both revenue and earnings for the third quarter and lowered its profit forecast for all of 2015.

The company said the decline in earnings and revenue was a result of costs associated with IBM’s transition to cloud- and mobile-based businesses, from its traditional large-scale management software business.

“We are continuing to make significant investments to build platforms around analytics, cloud, mobility and security that lay the foundation for a new era of cognitive business where we see long-term value for our clients and shareholders,” CEO Ginni Rometty said in a statement.

Net income fell to $2.96 billion in the quarter ended Sept. 30, or $3.02 per diluted share, from $3.45 billion, or $3.46 per diluted share, in the year-ago period.

Earnings adjusted for acquisition-related and other items of $3.34 per share beat the analysts’ consensus estimate of $3.30.

The company lowered its earnings guidance for all of 2015 by about $1.00 per share to $14.75 to $15.75 per share.

Revenue dropped to $19.28 billion in the quarter from $22.40 billion in the third quarter last year.

“The [global business services] transformation is taking longer as the market shifts away from some of the more traditional application areas and our storage disc business was weaker,” Martin Schroeter, chief financial officer, said during the conference call with analysts. But he said the company’s transition will pay off over the long term.

“We’re certainly not pleased with the quarter,” said Peter Wahlstrom, analyst at Morningstar, in a research note, “but we don’t think IBM’s business is broken.

Wahlstrom added that IBM might experience “choppy performance” for more quarters, if not more years, but he expects IBM to overcome flat performance in revenue.

North American revenue fell 3 percent, the largest decline by region, while Asia Pacific revenue fell 1 percent and Europe, the Middle East and Africa rose 1 percent.

Shares of IBM ended Tuesday’s session at $140.64, down $8.58 from Monday’s closing price of $149.20.

(Photo on top: IBM Corp. reported its third-quarter earnings on Monday. Patrick/Flickr)