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IBM earnings miss forecast; firm to pay $1.5 billion to shed chip unit

IBM reported earnings that missed Wall Street expectations.
IBM reported earnings that missed Wall Street expectations.
(Stan Honda / AFPGetty Images)
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Associated Press

IBM Corp. disappointed investors Monday, reporting weak revenue growth again and a big charge to shed its costly chip-making division as the tech giant tries to steer its business toward cloud computing and social-mobile services.

Is it too late for IBM? Or can Big Blue weather the competition as it transforms its business for the cloud?

Remaking itself is something IBM has done many times through its long history. Starting more than a century ago in punch-card tabulators and time clocks, it grew to encompass the giant mainframe computers and Selectric typewriters of the 1960s and launched its revolutionary personal computer in the 1980s.

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But by the early 1990s, its early lead in personal computing was destroyed by tough competition that left it on the brink of bankruptcy. So then-Chief Executive Lou Gerstner reinvented the company’s mission to focus on providing technology services to businesses and government. Business soared — technology and business services account for more than half of IBM’s revenue today.

But the huge company — 431,000 employees at last count — has struggled under the weight of capital-intensive businesses as nimbler competitors led expansion into cloud services, in which software and data storage run on servers connected to the Internet rather than on computers on the users’ desktops. IBM faces companies such as Amazon.com and Salesforce.com that already offer “software as a service” to businesses in specialized areas. That new challenge has flattened out sales for IBM’s services businesses.

“While the newer strategic areas are seeing significant growth, the traditional businesses are still declining at a faster pace,” Wells Fargo analyst Maynard Um wrote in a note to investors Monday.

In the third quarter, IBM reported a 15% drop in hardware revenue, now just 11% of the company’s business. Services revenue was flat when adjusting for currency-exchange effects and the sell-off of a customer care outsourcing business. Software revenue, which made up 27% of total sales, slipped 2%.

Part of the solution for IBM is to shed some of those older businesses, what CEO Ginni Rometty calls “empty calories.” Besides the announcement Monday that IBM will pay $1.5 billion to Globalfoundries to take over its costly chip division, the company this month sold its low-end server business to Lenovo Group for $2.1 billion. At the same time, it has been making new investments to catch up in cloud computing. IBM opened a new center in North Carolina last month that provides cloud services to help companies keep running in the event of a disaster.

IBM’s third-quarter adjusted earnings from continuing operations of $3.68 a share and revenue of $22.4 billion were short of what analysts polled by FactSet predicted. They forecast earnings of $4.32 on revenue of $23.39 billion.

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With its transformation ongoing and a weaker-than-expected third quarter, IBM is backing away from a 2015 forecast for adjusted earnings of $20 a share.

The company’s shares fell $12.95, or 7%, to $169.10.

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