That is the question investors are asking in the fallout of IBM’s IBM +0.06% dismal third-quarter earnings last week, which included a $1 billion revenue miss. Those results — so far — shaved nearly 7% off its shares in the last few days, with IBM’s stock falling Thursday to its lowest level in two years.
The biggest cause of the revenue shortfall was IBM’s hardware business, which is suddenly seeing a faster decline, in particular in its high-end systems running IBM’s version of Unix. That decline was also exacerbated by a 40% drop in hardware sales in China, some of which was the result of an economic reform plan, and some due to execution.
Of course, most investors realize that IBM, with flat revenue of $105 billion last year, is no longer a growth company. But it has remained an investor favorite for the cash it returns to investors via its dividend (currently 95 cents a share), its consistent share buybacks, and double-digit earnings growth.
But the big drop in its hardware revenue was not the only disappointment. IBM only slightly exceeded Wall Street’s consensus earnings estimates in the quarter because of a lower-than-expected tax rate.
“IBM has badly missed not just revenue but profit two of the last three quarters, which is unusual,” said UBS analyst Steve Milunovich, in a note to clients. Milunovich downgraded IBM to neutral and trimmed estimates for 2014. He noted that while results could improve as 2014 unfolds, he believes the next two quarters “likely won’t be too encouraging.”
“The poor near-term results and question raised about farther out earnings power can’t be ignored,” he wrote late last week.
Chief Executive Virginia “Ginni” Rometty took quick action. In an internal email to employees that was reviewed last week by the Wall Street Journal, she voiced her concern that the company needs to ‘”do better.” “Ours is a pay-for-performance culture and we must all be committed to taking action to address our performance gaps,” Rometty wrote, according to the Journal.
Date: Oct. 22, 2013