IBM is investing heavily in the future. It has placed multibillion-dollar bets on businesses to deliver computing remotely over the Internet cloud, on sophisticated data-analysis software and on its Watson artificial-intelligence technology.
But the giant technology company faces a classic bind: Can the new offerings grow fast enough to offset the erosion of its traditional hardware and software businesses?
The company’s first-quarter results underline the challenge. The company reported on Wednesday that its profit fell and its revenue declined. It is the eighth consecutive quarter in which IBM’s revenue has slipped, with this quarter hit hard by a falloff in its hardware business.
Revenue for the quarter was $22.5 billion, compared with $23.4 billion in the year-earlier quarter. Sales came in below Wall Street analysts’ average estimate of $22.9 billion, as compiled by Thomson Reuters.
IBM’s net income fell 21 percent to $2.4 billion, compared with $3 billion a year earlier. Operating earnings per share fell 15 percent, to $2.54 a share, from $3 a share last year. On that basis, the company’s profit performance matched the analysts’ forecast of $2.54 a share. The percentage decline in earnings per share was less than in net profit because there were fewer shares outstanding. The company steadily buys back its shares, including unusually aggressive purchases of $8 billion in the quarter.
IBM reported its results after the close of the stock market. In after-hours trading, its stock price fell about 4 percent from the closing price of $196.40 a share.
In a statement, Virginia M. Rometty, IBM’s chief executive, pointed to moves taken to “transform parts of the business” and said that later in the year, “We will begin to see the benefits from these actions.”
The weakness in hardware, where sales slid 23 percent, was no surprise. IBM is not expected to have a new mainframe computer offering until next year, so this is a period in which the sales of the current models are trailing off. And IBM’s lines of smaller server computers, used in data centers, continue to struggle.
In January, the company agreed to sell its unit that makes industry-standard servers, which are powered by chips like those used in personal computers and made by Intel and Advanced Micro Devices, for $2.3 billion to Lenovo of China. That sale will not be completed until later this year, so that business remains on IBM’s books until then.
IBM’s quarterly profit was hurt by a charge of $870 million for the severance costs for workers who were laid off. Every year, the company, which employed more than 430,000 people worldwide at the end of 2013, sheds workers in markets and product areas that are declining and adds employees in other units. But the $870 million charge is high, and the company chose to take it all in the first quarter.
IBM was also hurt by a slowdown in previously fast-growing markets abroad. Sales in China, for example, were off 20 percent.
The company’s big technology services business reported slightly lower revenue of $13.8 billion, though it grew some when discounting the impact of a stronger dollar. The software business grew slightly to $5.7 billion.
IBM continually shifts its portfolio of businesses, in line with its strategy to shed lower-profit products and invest in higher-margin fields. Over the years, IBM has sold off its personal computer and storage disk-drive divisions, and this year, it sold its industry-standard server business. In February, the company completed the sale of a services unit, which had annual revenue of more than $1 billion a year but was a labor-intensive operation that ran call centers.
IBM has long said its business model is geared to deliver profit growth rather than sales growth. But investors, analysts say, are anxious to see signs of revenue growth, especially since cost-cutting and share repurchases have played a large role in IBM’s strong earnings performance in recent years. The first-quarter results, according to A. M. Sacconaghi, an analyst at Bernstein Research, only “amplified the existing concerns about the quality of I.B.M.’s earnings.”
Under Ms. Rometty, who became chief executive two years ago, IBM has made large investments in big data analytics and cloud computing. In the last three months, said Frank Gens, chief analyst at IDC, the investment program has “gone into hyperdrive,” including billion-dollar commitments to make Watson a mainstream business, build out a network of cloud-style data centers and push its traditional software onto the cloud to attract outside software developers.
So IBM, analysts say, is making the right strategic moves. Still, Steven Milunovich, an analyst at UBS Securities, said, “The question is, can the new stuff really grow fast enough to move the needle, to make up for the challenges in IBM’s legacy businesses?”
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