IBM Revenue Misses Estimates, Showing Continuing Cloud Struggles

Lenovo Group Ltd., the world’s largest maker of personal computers, agreed to buy International Business Machines Corp.’s low-end server business for $2.3 billion amid the PC industry’s worst-ever decline.
Lenovo Group Ltd., the world’s largest maker of personal computers, agreed to buy International Business Machines Corp.’s low-end server business for $2.3 billion amid the PC industry’s worst-ever decline.

(Bloomberg) -- International Business Machines Corp. reported quarterly revenue that missed analysts’ estimates, signaling Chief Executive Officer Arvind Krisha’s plans to shed legacy businesses and focus on cloud services will take more time to bear fruit.

Sales fell 6.5% to $20.4 billion in the three months ended Dec. 31, the Armonk, New York-based company said Thursday in a statement. That was below the $20.75 billion analysts had forecast, on average, and marked the 10th consecutive quarter with no year-over-year increase in revenue. The shares fell in extended trading.

Last October, Krishna announced he would spin off IBM’s managed infrastructure services unit into a separate publicly traded company. The division, which is currently part of IBM’s Global Technology Services division, handles day-to-day infrastructure service operations, like managing client data centers and traditional information-technology support for installing, repairing and operating equipment. While the unit accounts for about a quarter of IBM’s sales and staff, it has seen business shrink as customers embraced the shift to the cloud, and many clients delayed infrastructure upgrades during the pandemic. The spinoff is scheduled to be completed by end of 2021.

Revenue declined across IBM’s business segments in the fourth quarter. Cloud and Cognitive Software, IBM’s biggest unit, saw revenue decrease 4.5% from a year earlier. That follows a 7% gain in that unit in the third quarter. Total cloud revenue increased 10% to $7.5 billion. In Global Technology Services, revenue fell 5.5% while Global Business Services dropped 2.6%. Systems revenue, which includes hardware and operating systems software, saw sales decline 18%.

Krishna said the company’s actions to focus on cloud and artificial intelligence “will take hold,” and give him “confidence we can achieve revenue growth in 2021.” The company hasn’t given specific financial forecasts since it withdrew its annual projection for 2020 in April.

IBM fell about 3% in extended trading after the results. The stock has declined about 5% over the past 12 months. It closed up 1.2% Thursday in New York at $131.65.

IBM seeks to distinguish itself from its bigger rivals in cloud, such as Inc. and Microsoft Corp., by offering its hybrid model, which assists clients in storing and computing data across on-premises infrastructure, private cloud services and servers run by public providers. Krishna was the driving force behind IBM’s $34 billion purchase of open source software provider Red Hat in 2018, the first step toward transitioning IBM into what it sees as a $1 trillion hybrid-cloud market, and which now leads much of the company’s growth. Red Hat revenue increased 19% in the fourth quarter to $1.3 billion.

IBM continues to make acquisitions to bolster its cloud credentials. The company has made seven acquisitions focused on cloud and AI since October, Chief Financial Officer James Kavanaugh said in the statement, including Taos Mountain LLC, a firm that helps companies shift software and data online, and Instana, which manages cloud applications.

Fourth-quarter earnings excluding some costs were $2.07 a share, beating the average analyst estimate of $1.79. Gross margin was 52.5%, 1.3 percentage points higher than analysts’ expected.

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