IBM: Singing the Big Blues Again

Before Steve Jobs’s second tour at Apple (AAPL), International Business Machines(IBM) was considered the biggest turnaround in tech history. After all, how many other companies founded in 1911 can boast more than $100 billion in revenue by being the world s largest service vendor and the second-largest software player? Remember Digital Equipment?

Big Blue fought insolvency with creative destruction, vastly restructuring its business focus under famed ex-Chief Executive Louis Gerstner and jettisoning its pioneering personal computer division back when doing so was sacrilege to competitors Hewlett-Packard (HPQ) and Dell (DELL), which now rue the day. IBM stock has shown a knack for ascendancy: Over the past five calendar years, the company has increased earnings per share by 16 percent per year, which was well above the 4 percent growth for the broader market during the same period, according to the brokerage firm Cantor Fitzgerald. During the financial crisis, which pounded most tech companies’ bottom lines, IBM increased earnings per share by 23 percent in 2008 and 13 percent in 2009. The hulking enterprise of 430,000 workers throws off so much cash that management has bought back hemispheres of the company.

Now Big Blue, a sprightly 102 years of age, must again reinvent, and drastically. On Wednesday night, management had to fess up to sales falling for the sixth straight quarter and the company’s hardware business posting a loss. IBM’s much-ballyhooed shift to higher-margin software and services—the core of its turnaround story—is now being eclipsed by a slump in sales of servers and other enterprise hardware. The fast-growing emerging economies that were filling IBM’s business pipeline are now stalling; IBM posted its first revenue decrease in those markets in its history last quarter. The company’s shares, which have the second-biggest impact on the Dow Jones industrial average among the index’s 30 members, plunged 6 percent on Thursday and are down this year, compared with the broader market’s 20 percent runup.

“We are taking action to improve execution in our growth markets unit and in the elements of our hardware businesses that are under performing,” CEO Ginni Rometty said in the quarterly statement.

Red ink is splattered on IBM’s income statement. In the first nine months of the year, the multinational lost $713 million in its hardware business, compared with $253 million in profit in the year-earlier period. Chinese sales tumbled more than 20 percent.

The poor near-term results and questions raised about farther-out earning power can’t be ignored, wrote UBS (UBS) analyst Steve Milunovich, in downgrading IBM shares from buy to neutral and slashing his price target from $235 to $186 (the stock now trades at $176). “Normally we would wait out mediocre results in preparation for the bounce back, but there are too many questions this time,” he stated. “Although many of the current negatives might reverse as 2014 unfolds, the next few quarters appear difficult and company credibility is at a low.”

Read more: IBM: Singing the Big Blues Again

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