IBM Shares Plunge As Revenue Declines For Another Quarter

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The tech and consulting giant IBM posted lower-than-expected revenue for the consecutive fourth quarter Friday, making its shares tumble. CEO Arvind Krishna has been steering the company into new business segments, but it seems like his turnaround plan will take more time to translate into concrete results.

Earnings Top Expectations

Non-GAAP earnings were $2.07 per share for the quarter that topped Wall Street’s expectations of $1.79 per share. However, they plunged 56% as compared to last year. IBM’s gross margins were bright with an increase of 51.7%. Big Blue’s full-year gross profit slightly tumbled to $35.5 billion.

Revenues Keep Falling

Revenues depressed analysts, declining 6% to $20.4 billion as compared to last year. Revenue from cloud and cognitive, IBM’s largest unit, plunged 4.5% to $6.8 billion after two years of growth. The unit gained 7% in the third quarter.

Highest Cloud Sales Still Not Enough To Offset Decline

Overall cloud sales jumped 10% to $7.5 billion, marking the highest-ever revenue from cloud for IBM yet. However, the pace of growth for the unit was slow as compared to the 19% increase in the previous quarter. Revenue from Global Technology Services and Global Business Services also declined by 5.5% and 2.6%, respectively. Systems unit decreased 18%.

Total revenue for the quarter declined 6.5% to $20.37 billion, below analysts’ estimates of $20.67 billion, as per IBES data from Refinitiv. The full-year revenue fell to $73.6 billion as compared to $77.1 billion in 2019.

Red Hat’s Contribution

The software company, Red Hat, which IBM acquired in 2018 led the increase in IBM’s revenue with its 19% increase in the fourth quarter to $1.3 billion.

The loss of revenue for the Armonk, New York-based IBM was attributed to the hesitance amongst clients to invest in long-term spending during the pandemic.

Transitioning Towards Hybrid-Cloud

CEO Arvind Krishna is targeting AI and hybrid cloud to bolster the falling revenue. Krishna took over as CEO in 2020 after Ginni Rometty who headed the empire for 22 consecutive quarters of revenue losses. He was also the driving force in the $34 billion acquisition of Red Hat in 2018 which was the company’s first transitioning step towards the $1 trillion hybrid-cloud markets.

Merger Binge

The 109-years old company has been on an acquisition spree since last year, having acquired four companies in the fourth quarter alone. The shopping binge was carried forward into the new year with a total of seven purchases done since October.

IBM’s Chief Financial Officer James Kavanaugh pointed out that the company increased investment across R&D and CapEx since October. The acquired firms include Taos Mountain LLC, Instana, and Nordcloud. The company is looking to differentiate itself from cloud rivals including Amazon and Microsoft through offering a hybrid model.

Spin-Off Plans

IBM is also planning to spin-off its legacy managed infrastructure services division into a separate publicly-traded company. Currently part of IBM’s Global Technology Services division, the unit monitors everyday infrastructure service operations including handling client information centers and traditional IT support for installing, fixing, and running equipment.

The unit contributes to around a quarter of IBM’s revenue and employees, yet its business has declined as customers are transitioning towards cloud and many customers delayed infrastructure upgrades due to the pandemic. The spin-off is expected to complete by the end of 2021.

Outlook

Krishna said that the separation would allow Big Blue to focus more on its new strategy that is all about hybrid cloud and artificial intelligence. Even though a forecast for revenue was not provided for the coming year, it is expected to reach a “sustainable” mid-single-digit growth once the spin-off completes. The company said it expects an adjusted free cash flow of $12 billion for 2021. Some reports also said that the company might cut staff internationally as part of its restructuring.

Shares of IBM declined 8.2% in premarket trading Friday leading to an opening bell price of $120.86 per share, trimming their three-month gain to around 4%.

Source Bloomberg The Street Silicon Republic

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