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IBM Declines After Hardware Slump Drags Down Quarterly Earnings

Friday, 19 April 2013 10:14 AM

International Business Machines Corp., the largest computer-services provider, fell the most in almost three years after missing profit estimates, hurt by a hardware slump and the failure to sign customers to contracts.

The shares dropped as much as 7.2 percent to $192.17 in New York, the biggest intraday decline since May 6, 2010. Before the tumble, the stock had been up 8.1 percent this year and hit a record high last month.

The Armonk, New York-based company posted first-quarter profit of $3 a share Thursday, missing the $3.05 predicted by analysts. It was the first earnings shortfall since 2005, according to data compiled by Bloomberg. In a bid to rebound, the company announced plans to spend $1 billion cutting jobs in the second quarter and will divest some businesses this year.

As part of the effort to slim down, IBM is in talks to sell its low-end server division, a person familiar with the matter said. Lenovo Group Ltd., which acquired IBM’s personal-computer business in 2005, is seen as the most likely bidder, said the person, who asked not to be named because the negotiations are private.

“It is a painful but smart move in the long run,” said Laurence Balter, an analyst at Oracle Investment Research in Fox Island, Washington. “The low-end server division was a drag, subtracting economic value from Big Blue.”

Deal Price

The server business may fetch $2.5 billion to $4.5 billion, depending on what assets and liabilities are included, the person familiar with the talks said. A deal is still several weeks away, according to the person.

For now, IBM Chief Executive Officer Ginni Rometty is struggling to revive growth. Amid weak demand for hardware and consulting work, especially in Europe, the company has been trying to push into more lucrative markets like data analysis and mobile-phone security.

“We did not achieve all of our goals in the period,” Rometty said in a statement.

The poor performance of some businesses, such as certain storage products, is prompting the company to take “substantial actions,” Chief Financial Officer Mark Loughridge said on a conference call. The moves will include job cuts, or “workforce rebalancing,” this quarter, he said. Loughridge declined to discuss the potential deal with Lenovo.

“I’m obviously not going to comment on rumors,” he said during the call.

Profit Drops

First-quarter net income slid to $3.03 billion, or $2.70 a share, from $3.07 billion, or $2.61, a year earlier, IBM said.

“It’s a combination of Europe, financial services and discretionary spending affecting their performance,” said David Grossman, an analyst at Stifel Nicolaus & Co. in San Francisco, who still advises buying IBM shares. “I wasn’t going into this quarter with grand expectations.”

Sales slid 2.3 percent to $104.5 billion in 2012, the first decline in three years. Last year’s revenue was just 0.8 percent more than 2008 sales. That’s the worst four-year growth rate since the period that ended in 2002, according to data compiled by Bloomberg.

The sales force has had difficulty closing deals, Loughridge said.

“By and large, this is an execution problem,” he said.

In recent years, the company has focused on improving earnings instead of revenue. That effort has included moving into higher-profit businesses, selling off segments that became too competitive to be profitable, and buying back shares. IBM maintained its forecast for 2013 earnings per share of at least $16.70 — on the road to its goal of $20 a share by 2015.

Big Data

Rometty has said that “big data” services, which let customers mine vast troves of information to make better decisions, are the company’s biggest priority for 2015.

In February, IBM said its data-analysis business will perform better than expected, adding $20 billion in annual revenue by 2015. That compares with an earlier forecast of $16 billion.

The plan to spend $1 billion on staff reductions continues a trend over recent years. IBM spent $803 million on workforce restructuring in 2012, up from $440 million in 2011. Last year’s rise was primarily due to actions outside the U.S. in the third quarter, according to IBM’s filings. The recent job-cut plan also will focus on overseas employees, IBM said.

An employee-advocacy group said in February 2012 that the company had fired more than 1,000 workers in North America in a single week. IBM didn’t comment on the claim.

Even with the job cuts, IBM’s workforce has steadily grown, partly through acquisitions. The company had almost 467,000 workers at the end of last year, up 7.8 percent from 2011. Net income per employee, a measure of productivity, declined 2.8 percent last year, according to data compiled by Bloomberg.

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International Business Machines Corp., the largest computer-services provider, fell the most in almost three years after missing profit estimates, hurt by a hardware slump and the failure to sign customers to contracts.The shares dropped as much as 7.2 percent to $192.17 in...
Friday, 19 April 2013 10:14 AM
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