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IBM Falls as Q1 Hardware Sales Disappoint

The promise of $20 a share by 2015 is looking harder to keep.

Shares of technology services and computing giant IBM fell by more than eight percent after hours as the company’s first quarter met expectations on earnings, but showed weaker-than-expected revenue led by a decline in hardware sales.

Profit on a per-share basis fell from the year-ago quarter by about 15 percent to $2.54. Sales, at $22.5 billion, fell about two percent after adjusting for currency effects. The results compare with the consensus view of analysts, who called for $2.54 per share on sales of $22.9 billion.

Hardware sales fell 23 percent to $2.4 billion in the quarter. Sales in the Systems and Technology business unit, which includes most hardware sales, declined consistently for more than two years.

Sales of IBM’s System Z mainframe fell 40 percent. Cloud revenue grew in the quarter by 50 percent, and IBM said the public cloud portion of that business is on a run rate to hit $2.3 billion by the end of the year.

The results were affected by an $870 million charge for a reduction in IBM’s workforce. The company said the charge was expected last quarter. They also include a pretax gain of $100 million, related to IBM’s sale of its $1.2 billion customer care outsourcing business, which it sold to Synnex.

The company raised its guidance for the full year, saying it expects to report per-share profits of at least $18, which is above the current consensus for the year of $17.84.

CEO Ginni Rometty has so far stood by the promise of her predecessor Sam Palmisano to deliver earnings of $20 per share by 2015. That was a promise he made in 2010 when Big Blue earned $11.67. That promise is looking harder to keep all the time.

The first quarter is always seasonally weaker, and the fourth always the strongest. As you can see from the screen grab I took from IBM’s 10K report on file with the US Securities and Exchange Commission below, IBM consistently delivers about 18 percent of its annual earnings in the first, and about 36 or 37 percent in the fourth quarter.

If IBM is going to hit $18 a share this year, this quarter has delivered only 14 percent of that, meaning the pressure is going to increase on Rometty and her team for better performance on the remaining three quarters, and even more than that in 2015. This is especially true if hardware sales, which is the majority of $57 billion Global Technology Services business, accounting for 57 percent of sales in 2013. (Click the table to make it bigger.)

The quarter was a busy one for Big Blue. In January it announced plans to sell off its low-end server business to China’s Lenovo for $2.3 billion. It also explored but did not announce the sale of its software-defined networking assets.

During the quarter, IBM also made big investments in the cloud and on its Watson cognitive computing business. It said it would spend $1.2 billion to increase the number of data centers for its SoftLayer cloud computing service. It also announced plans to invest up to $1 billion in companies building applications and services on its Watson platform.

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