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IBM misses sales estimates, casting doubt on growth engines

New York

INTERNATIONAL BUSINESS MACHINES Corp missed analysts' quarterly revenue estimates, ending a short-lived streak of sales gains and casting doubt on its strategy to boost growth through new businesses such as cloud and artificial intelligence. The shares slipped in extended trading.

Revenue fell 2.1 per cent to US$18.8 billion in the third quarter, while analysts were expecting US$19.1 billion. Cloud revenue, which has become a key metric to watch, grew 10 per cent in the period to US$4.5 billion. That was slower than the 20 per cent expansion in the second quarter. Profit, excluding certain items, was US$3.42, IBM said Tuesday in a statement, compared with the average projection of US$3.40 a share, according to data compiled by Bloomberg.

After six years of declining sales, the 107-year-old company showed gains in the past three quarters. Those were largely due to its legacy mainframes, the massive computers that help power global financial transactions and other complicated calculations for businesses and governments.

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A new sales cycle for those computers, launched about a year ago, is now winding down and the newer businesses IBM has been counting on to spur future, sustainable growth - known as "strategic imperatives" - have expanded over the past three years, but have yet to fulfil their promise. The group includes IBM's Watson artificial intelligence programme, security software and cloud computing.

In the third quarter, revenue from strategic imperatives rose 13 per cent for the past 12 months to US$39.5 billion. That was a slower 12-month growth rate than the 15 percent reported in the previous quarter.

IBM shares fell 4.7 per cent to US$138.25 in extended trading. They have declined 5.4 per cent this year, compared with a 5.1 percent gain in the Standard & Poor's 500 Index.

Jim Kavanaugh, IBM's chief financial officer, said in an interview that the deceleration in cloud and strategic imperatives revenue growth was because of IBM "wrapping up our most successful mainframe product ever".

Revenue in the Cognitive Solutions unit, which includes many Watson-related products, fell 6 per cent in the third quarter, IBM said. Sales in the Global Business Services division rose one per cent, while Technology Services & Cloud Platforms posted a revenue drop of 2 per cent. The company's Systems unit saw sales gain one per cent, and Global Financing revenue declined 9 per cent.

On a conference call following the report, Mr Kavanaugh said that IBM "fell short" in third-quarter signings in services, but added that the business is expected to ramp up in the next quarter. "We've got a chance to exit the year with a very strong position in our services base of business," he said.

IBM is bolstering its appeal to customers by strengthening its AI arm, running 75 active blockchain networks and helping to protect banks from cyberattacks, Mr Kavanaugh said, adding that more than 400 businesses have already embraced IBM's one-year-old secure Cloud Private programme. BLOOMBERG