The Business Times

IBM profit plunges on disposal of chip unit, poor sales

Published Mon, Oct 20, 2014 · 11:00 PM

[New York] Shares of IBM plummeted on Monday after earnings collapsed on a US$4.7 billion charge and weak sales raised questions about the technology giant's efforts to remake itself.

Third-quarter earnings sank from US$4.0 billion a year ago period to just US$18 million, mainly due to a charge for offloading its money-losing microchip business to GlobalFoundries, a deal also announced Monday.

Analysts said the results pointed to continued weakness in IBM's core businesses, as the iconic century-old "Big Blue" seeks to shift away from low-return commodity products and toward growing sectors such as data analysis and cloud computing.

Revenues fell four percent to US$22.4 billion, marking the 10th straight quarter of year-over-year sales decline, and operating earnings were lower.

The company, meanwhile, dropped its previous forecast to grow profits to US$20 a share in 2015 from US$16.99 in 2013.

At mid-morning, IBM shares stood at US$169.70, down 6.8 per cent, dragging the Dow Jones Industrial Average into the red.

"We are disappointed in our performance," said chief executive Ginni Rometty.

"We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry." First incorporated in 1911 but with corporate ancestors dating to the 1880s, IBM has divested many older businesses such as personal computers and now chip making.

It has built out technology services businesses, such as its new Watson Group, which offers what IBM calls a "cognitive technology" for cloud-based data crunching and other services.

Rometty said the company is moving IBM to higher value services by selling nonstrategic businesses. However, service revenues fell three percent in the last quarter, while software sales dropped two percent, according to Monday's report.

Sales in Asia Pacific were down nine percent, while sales in both the Americas and Europe/Middle East Africa fell by two per cent.

A note from Jefferies, which has an "underperform" rating on the stock, said the results "epitomize our concerns around the transitions IBM faces on multiple businesses." Bank of America/Merrill Lynch said IBM's transformation is "under way" but the shift "will take time." In the deal announced Monday, IBM will pay GlobalFoundries US$1.5 billion in cash to take over its money-losing semiconductor manufacturing operations in New York and Vermont.

Although the cash payments will be made over three years, IBM took a US$4.7 billion pre-tax charge in the third quarter.

GlobalFoundries will gain thousands of patents and other intellectual property, and will be IBM's exclusive supplier for a key group of chips for 10 years.

"The agreement, once closed, enables IBM to further focus on fundamental semiconductor research and the development of future cloud, mobile, big data analytics, and secure transaction-optimized systems," IBM said. AFP

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