IBM Corp. shares fell the most in more than two years after its earnings report put a budding growth spurt in doubt.
Shares of the technology company fell as much as 6.6 per cent on Wednesday, the most since January, 2016, to US$150.26. IBM released its first-quarter results on Tuesday evening, showing narrower profit margins and no revenue growth, excluding help from a weak U.S. dollar.
The report cast a shadow over an effort to sell more profitable cloud-based software to revive growth after five years of revenue declines.
Although heading in the right direction, the rebirth of International Business Machines Corp. has yet to materialize, Daniel Ives, an analyst with GBH Insights LLC, said in a note to clients. “Patience is wearing thin on the Street around the IBM turnaround story, which continues to be elusive.”
First-quarter revenue came in at US$19.1-billion, beating the average analyst estimate of US$18.8-billion. That’s 5 per cent higher than a year earlier, but flat without currency fluctuations. Margins slipped 0.6 percentage points to 43.2 per cent. Earlier this year, chief financial officer James Kavanaugh said margins would stabilize “immediately” in the first quarter.
Growth in the cloud business was 14 per cent, lower than the 2017 average of 24 per cent, Bloomberg Intelligence analyst Anurag Rana said. That “puts a question mark on IBM’s hybrid cloud strategy,” he added.
During a conference call, Mr. Kavanaugh pushed back on questions from analysts about margins and whether revenue can keep expanding. He pointed to growth across the company’s business lines and said execution problems in IBM’s computer-storage unit and consulting business were partly to blame for the quarter’s challenges.
Mr. Kavanaugh described the overall picture as positive and said chief executive officer Ginni Rometty’s goal of getting about half of sales, or US$40-billion, from newer businesses was ahead of schedule.
“This is a good start to the year,” Mr. Kavanaugh said. “We’re well on pace to deliver that [US]$40-billion earlier than 2018.” Those new businesses represented 47 per cent of revenue over the past 12 months, he noted.
Ms. Rometty reversed the trend of revenue declines late last year, although that boost wasn’t fuelled as much by new businesses as by cyclical demand for more traditional mainframe computers. Investors are watching closely for gains in newer software and services to support growth when the bump from hardware sales fades. In the meantime, Ms. Rometty has shifted thousands of jobs outside the United States and reduced costs.
On average, analysts expected IBM to lift its full-year profit forecast, but the company kept it at US$13.80 a share.
Armonk, N.Y.-based IBM said adjusted earnings per share were US$2.45 in the quarter, up 4 per cent from a year earlier. Analysts were expecting US$2.42 a share on average, according to data compiled by Bloomberg.
Some investors aren’t waiting around to see if Ms. Rometty can return Big Blue to its glory days as one of the tech industry’s bellwethers. Warren Buffett, who plowed more than US$10-billion into the company in 2011, exited his position almost completely in recent months.