IBM Corp missed revenue expectations for the fourth consecutive quarter as the world’s biggest technology services company grappled with weakening demand for its servers and storage equipment, particularly in growth markets like China.
As a result of the disappointing results, Chief Executive Officer Ginni Rometty and her team will forego their annual incentive payments for 2013 as IBM’s total revenues fell 2 percent to $99.8 billion for the year.
Total revenue for the quarter ended Dec. 31 fell 5 percent to $27.7 billion, missing analysts expectation of $28.25 billion, according to Thomson Reuters I/B/E/S.
Hardware revenue plunged 26 percent, leading to a $750 million collapse in profit for that segment. IBM shares fell 3.5 percent to $181.68 in after-hours trade.
IBM’s results are certain to accelerate the company’s restructuring.
“As we look forward to 2014, we will continue our transformation,” Martin Schroeter, IBM’s chief financial officer, told analysts. “We will acquire key capabilities, we will divest businesses and we will rebalance our workforce as we continue to return value to shareholders.”
IBM, which has been expanding its higher-margin services and software businesses over the last decade, is expected to relinquish more of its lower-margin hardware business. Revenue in that business, which includes server and storage products, fell for the ninth consecutive quarter as more companies switched to the cloud from traditional infrastructure.
‘Everything but Growth’
Emerging market sales dropped 6 percent, led by China, where IBM reported a 23 percent collapse in revenue.
A backlash against U.S. government spying in emerging economies and a move by Beijing to encourage state-owned companies to buy domestically-branded products contributed to plummeting demand, some analysts said.
“Their growth markets were everything but growth,” Forrester analyst Andrew Bartels said. “They have had quite a bit of success with sales of hardware in these emerging markets, but these markets are not doing well. They’re facing competition in those markets.”
“China is going through a very significant economic set of reforms,” Schroeter said on the earnings call. “While they have slowed, we don’t think that this opportunity has gone away.”
Schroeter said that revenue in the world’s second-biggest economy, which accounts for about 5 percent of IBM’s sales, will take several quarters to recover.
“It’s not going to rebound immediately,” he said.
IBM’s China difficulties, coupled with the company’s ongoing weakness in hardware sales, may accelerate IBM’s sale of the its low-end servers business to Lenovo Group Ltd, said Steve Zhang, a senior technology analyst at Macquarie Bank in Hong Kong.
Sources said IBM and China’s Lenovo have revived discussions about a sale of the company’s low-end server unit, but executives did not mention that on Tuesday.
“Theoretically, if IBM does sell is low-end hardware business, there should be some upside because they will be able to sell into government agencies and state-owned enterprises,” Zhang said.
IBM will be “on a trajectory to growth” in emerging markets by the end of the year, Schroeter said. “We’re comfortable that we get back to mid-single digits across the growth market regions by the end of the year.”
IBM forecast that full-year 2014 adjusted profit would beat analysts’ expectations and also affirmed its 2015 target for operating EPS of at least $20 per share.
Edward Jones analyst Josh Olson told Reuters the company would need solid performance in software and services to meet its target, since expectations are that hardware will not contribute to profit in 2014.
“Assuming a normalized tax rate, this doesn’t leave a lot of room for error,” he said.
No Incentive Payments
“In view of the company’s overall full-year results, my senior team and I have recommended that we forgo our personal annual incentive payments for 2013,” CEO Rometty said in a statement. For 2013, her base pay was $1.5 million and annual incentive payment target was $4 million.
Revenue from IBM’s system and technology unit, which includes servers and storage, fell 26.1 percent to $4.26 billion. Revenue from global technology services, its largest business, fell 3.6 percent to $9.92 billion.
Software revenue was the only bright spot. It grew 2.8 percent to $8.14 billion in the quarter.
IBM and rivals such as Oracle and SAP are racing to meet surging demand for web-based software products, better known as cloud computing.
Moving to the cloud allows businesses to cut costs by ditching bulky servers for network-based software and using remote data centers run by technology companies.
The global cloud services market last year grew by almost a fifth to an estimated $131 billion, according to research firm Gartner. IBM Markets Intelligence estimates the market could be as big as $200 billion by 2020.
Net income for the fourth quarter rose to $6.2 billion, or $5.73 a share, from $5.8 billion, or $5.13 per share a year earlier. It got help though from a lower tax rate of 11.2 percent in the fourth quarter, down 14.3 points from a year ago.
On an adjusted basis, it earned $6.13 per share, above analysts’ estimates of $5.99 per share.
Before its after-hours decline, the stock closed at $188.43 on Tuesday on the New York Stock Exchange. It has gained about 2 percent since it reported third-quarter results in October. (Reuters)