IBM posts first revenue miss in five quarters

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IBM is shifting to cloud, security software, data analytics and artificial intelligence.
IBM is shifting to cloud, security software, data analytics and artificial intelligence.

International Business Machines (IBM) reported a bigger-than-expected decline in revenue for the first time in five quarters due to weak demand in its IT services business, a sign the company's turnaround could take longer than expected.

Shares of IBM tumbled 4.7% to $162 in trading after the bell yesterday. At current levels, the stock is set to more than erase its roughly 2.5% gain this year.

With demand for its legacy hardware and software businesses stagnating, IBM has been shifting towards cloud-based services, security software, data analytics and artificial intelligence such as its supercomputer Watson, which once defeated human contestants in the quiz show Jeopardy.

These "strategic imperatives", spread across IBM's various businesses, continued to grow in the first quarter, but failed to offset weakness in the company's core operations, especially at the technology services and cloud platforms business.

IBM could not close some large deals in that business, which is its largest, while a couple of large clients took their operations in-house, chief financial officer Martin Schroeter said during a conference call.

As a result, IBM's overall revenue decline increased to 2.8% in the first quarter from 1.3% in the fourth quarter, and widely missed analysts' expectation of a 1.6% drop.

"I think the frustration lies with the overall miss on revenue," Edward Jones analyst Bill Kreher said.

"The Street has given IBM some credit over the last year that the transition is taking shape, so I think that's where the risk lies ... execution needs to be strong."

Turnaround taking time

IBM's revenue of $18.16 billion in the first quarter missed analysts' estimate of $18.39 billion, according to Thomson Reuters I/B/E/S.

Revenue in the technology services and cloud platforms business dropped 2.5% to $8.2 billion. The business accounted for about 45% of total revenue.

The company said gross profit margin fell in all five of its reporting units. Overall adjusted gross margin of 44.5% missed analysts' estimates of 47.7%.

However, "strategic imperatives" revenue growth accelerated to 12% in the first quarter from 11% in the fourth.

Revenue from "strategic imperatives" was $7.8 billion in the latest quarter, accounting for 42% of total revenue, up from 37% a year earlier.

"The company at some point will see the newer businesses overtake legacy, but it appears it's going to take a little bit longer than previously believed," Kreher said.

IBM's net income dropped 13% to $1.75 billion. Excluding items, it earned $2.38 per share, beating analysts' average estimate of $2.35.

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