I.B.M. Squeezes Out a Profit as Its Revenue Declines

I.B.M. delivered a mixed and somewhat unsettling quarterly performance on Tuesday. Profits barely exceeded Wall Street’s expectations, while revenue fell well below.

The results, analysts said, were unlikely to reassure investors concerned about the global outlook for technology spending. In a conference call with analysts, Mark Loughridge, I.B.M.’s chief financial officer, said the revenue shortfall came from a slowdown in business, especially in September, in certain markets including the United States, where revenue fell 5 percent.
“It was surprisingly disappointing,” said A. M. Sacconaghi, an analyst at Sanford C. Bernstein. “All the businesses were light.”
In after-hours trading, I.B.M. shares fell $7.10 a share, or 3.4 percent, to $203.90. In the regular session, the company’s stock price rose 1 percent, or $2.07 a share, to close at $211.00 a share.
I.B.M. is the world’s largest supplier of information technology — computer hardware, software and services — to corporations and governments. So the company’s results are watched as a gauge of technology spending trends.
But I.B.M., more than other computer companies in the corporate market, has steadily shifted its business in recent years to software and services. As a result, an estimated 40 percent of the company’s revenue and 60 percent of its profits come from steady subscriptionlike businesses, mainly software license fees and services contracts. That means I.B.M. is more insulated from industry cycles than most other technology suppliers.
I.B.M. has also shed hardware businesses with low profit margins including personal computers and disk drives.
The strategy, analysts note, has been a disciplined focus on profit growth rather than enlarging its yearly revenue. The latest such step came in August, when I.B.M. sold its computerized cash register business to Toshiba.
For the third quarter, net income was flat at $3.8 billion. The reported net profit included a $160 million charge to take account of a London court ruling against I.B.M. last week involving pensions. The court ruled that some British workers could retire at 60 years old and still receive their full pensions. The company had maintained that only employees who retired at 63 should receive full pensions.
The company’s operating profit of $3.62 a share, up 10 percent from the year-ago quarter, came in just above the average estimate of analysts of $3.61 a share, compiled by Thomson Reuters.
Revenue for the quarter fell 5 percent, to $24.7 billion, well below the Wall Street consensus of $25.4 billion. Excluding the effect of currency translation, revenue fell 2 percent in the quarter.
In a statement, Virginia M. Rometty, I.B.M.’s chief executive, pointed to the solid profit performance. “In the third quarter,” Ms. Rometty said, “we continued to drive margin, profit and earnings growth through our focus on higher-value business, strategic growth initiatives and productivity.”
The company’s gross profit margin rose 1.2 percent from the year-earlier quarter, to 48.1 percent.
I.B.M. reiterated its forecast for the year of operating earnings per share of “at least $15.10.” Some analysts had expected I.B.M. to raise its guidance for the year, if the quarter showed encouraging strength.
There were strong businesses in the mix for I.B.M. While many analysts had worried that the recent slowing of the Chinese economy might hit the technology sector, the company’s revenue in China increased 19 percent in the quarter. New businesses that I.B.M. has earmarked for growth seem to be thriving.
Hardware revenue fell 13 percent, to $3.9 billion. But Mr. Loughridge noted that a new model of mainframe computer, which began shipping in mid-September, and other new offerings, should restore the hardware business to growth.
Software revenue slipped 1 percent, to $5.8 billion. Mr. Loughridge said a handful of software deals failed to close at the end of the quarter, and they should add to revenue in the fourth quarter.
I.B.M.’s big services business declined about 5 percent, to $14.5 billion. Signings of new contracts, an indicator of future business, reached $13.3 billion, an encouraging performance. And Mr. Loughridge said I.B.M. has been extracting itself from less-profitable deals and that revenue would suffer in the short term.
But Mr. Loughridge also said there was weakness in services for helping companies install and run traditional business software applications for human resources, procurement and managing customer relationships. That, according to Mr. Sacconaghi, the Bernstein analyst, suggests companies may be moving from traditional software applications to software provided over the Internet from remote data centers, so-called cloud computing.
I.B.M. has its own cloud offerings. But putting traditional software in place, Mr. Sacconaghi notes, is a big business for I.B.M. services. “It at least raises a basic question about the future of that business,” he said.

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