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Apr 18, 2017

IBM revenue declines as weak demand hits tech services business

IBM

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International Business Machines Corp (IBM.N) reported a bigger-than-expected decline in revenue for the first time in five quarters due to weak demand in its IT services business, a sign that the company's turnaround could take longer than expected.

Shares of IBM, whose revenue has now fallen for 20 quarters in a row, tumbled 4.7 per cent to US$162 in trading after the bell on Tuesday. At current levels, the stock is set to more than erase its roughly 2.5 per cent gain this year.

With demand for its legacy hardware and software businesses stagnating, IBM has been shifting towards cloud-based services, security software, data analytics and artificial intelligence such as its supercomputer Watson, which once defeated human contestants in the quiz show Jeopardy.

These "strategic imperatives," spread across IBM's various businesses, continued to grow in the first quarter, but failed to offset weakness in the company's core operations, especially at the technology services and cloud platforms business.

IBM could not close some large deals in that business, which is its largest, while a couple of large clients took their operations in-house, Chief Financial Officer Martin Schroeter said on a conference call.

As a result, IBM's overall revenue decline increased to 2.8 per cent in the first quarter from 1.3 per cent in the fourth quarter, and widely missed analysts' expectation of a 1.6-per-cent drop.

"I think the frustration lies with the overall miss on revenue," Edward Jones analyst Bill Kreher said.

"The Street has given IBM some credit over the last year that the transition is taking shape, so I think that's where the risk lies ... execution needs to be strong."

TURNAROUND TAKING TIME

IBM's revenue of US$18.16 billion in the first quarter missed analysts' estimate of US$18.39 billion, according to Thomson Reuters I/B/E/S.

Revenue in the technology services and cloud platforms business dropped 2.5 per cent to US$8.2 billion. The business accounted for about 45 per cent of total revenue.

The company said gross profit margin fell in all five of its reporting units. Overall adjusted gross margin of 44.5 per cent missed analysts' estimates of 47.7 per cent.

However, "strategic imperatives" revenue growth accelerated to 12 per cent in the first quarter from 11 per cent in the fourth.

Revenue from "strategic imperatives" was US$7.8 billion in the latest quarter, accounting for 42 per cent of total revenue, up from 37 per cent a year earlier.

" ... The company at some point will see the newer businesses over take legacy, but it appears it's going to take a little bit longer than previously believed," Kreher said.

IBM's net income dropped 13 per cent to US$1.75 billion. Excluding items, it earned US$2.38 per share, beating analysts' average estimate of US$2.35.