IBM said it will no longer reach its earnings forecast for 2015, ditching a five-year profit goal as the company struggles to transform quickly enough to cope with an industrywide shift to the cloud-computing era.
The company, which employs more than 3,000 people in Ireland, said it will provide an update on its 2015 projections in January. The shares tumbled as much as 9.3 per cent in early trading.
"We are disappointed in our performance," chief executive officer Ginni Rometty said in a statement today. "We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry."
Rometty had been banking on a strong second half of the year to meet profit goals, including for 2014 adjusted earnings of at least $18 a share. The company is now backing away from a five-year plan to reach adjusted profit of $20 a share by 2015, up from $11.67 in 2010. The pledge was instated by former CEO Sam Palmisano and sustained by Rometty, who succeeded him in 2012.
"IBM needs to find success and growth in the cloud through organic and acquisitive means," said Daniel Ives, an analyst at FBR Capital Markets. "Otherwise there could be some darker days ahead for the tech giant and its investors."
Globalfoundries deal
The Armonk, New York-based company now expects 2014 operating earnings per share to fall 4 percent to 2 percent from $16.64 in 2013, according to the slides. That reflects changes for the chipmaking unit, which is now classified as a discontinuing operation.
IBM is taking a third-quarter pretax charge of $4.7 billion for the business. Earlier today, the company announced an agreement to pay Globalfoundries Inc. $1.5 billion to take over IBM’s unprofitable chip-manufacturing division, a deal that will remove a drag on earnings.
IBM’s technology customers 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. On a conference call today, IBM said it will create a separate business unit for its cloud-computing operations. 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.
Cloud revenue
Cloud offerings delivered as a service are now at an annual run rate of $3.1 billion, compared with $2.8 billion as of the second quarter. That’s still a fraction of IBM’s total $100 billion in revenue last year. As it reshapes itself, IBM still has 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 raised debt to fund share buybacks, laid off workers and reduced the company’s tax rate.
Bloomberg
