Shares of International Business Machines Corpslipped during regular trading hours today following last night’s earnings report, which included not only weakness in software but also a deceleration in cloud growth. This is a huge problem for IBM because the cloud is widely seen as the one thing that can save the big legacy tech firms.
Weakness in IBM’s earnings report
Two teams of analysts at Deutsche Bank issued analysis on IBM’s earnings report. Although the earnings results were about in line with consensus estimates, the company’s earnings saw a big benefit of about 20 cents per share as a result of a lower tax rate, which seems to indicate that fiscal 2015 earnings actually missed management’s guidance, said analyst Sherri Scribner and her team.
International Business Machines Corp posted fourth quarter revenue of $22.1 billion, representing a 9% year over year decline or 2% in constant currency, which slightly beat the consensus of $22 billion. The Hardware segment offered a bit of upside with a 3% increase in constant currency. Software revenue fell 6% year over year in constant currency, which Scribner said was the segment’s worst performance since at least 2004.
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International Business Machines Corp – Price target cut
Revenue from IBM’s Strategic Imperatives segment saw a 26% increase year over year in fiscal 2015, but growth in the Cloud business decelerated to a 10% growth rate in the fourth quarter. Further, declines in the company’s core business were too much, as both increases were not enough to offset them. The Deutsche Bank team expects the challenges in the core business to continue to be a major headwind for IBM.
Management’s guidance for fiscal 2016 was also weaker than expected with earnings at $13.50 per share for the full year, compared to the consensus estimate of $14.97. As a result, they cut their estimates and their price target for IBM, pushing it down from $150 to $135 per share and maintaining their Hold rating on the company. They’re also concerned about the continuing macro challenges like foreign exchange headwinds.
IBM challenged by transition
In a separate report, Scriber’s colleague Bryan Keane and his team said IBM’s Global Business Services segment continues to be a problem as it returned a 4% decline in sales for the quarter, representing a drag on the company’s services revenue. He believes that the company is ceding share to competitors and experiencing pricing pressure.
He added that the problems in the area of services highlights the challenges IBM is facing in the shift to the cloud. He believes that the company’s ERP exposure is pressuring its Global Business Services revenue as nimbler competitors take share.
Shares of IBM tumbled by as much as 6.1% to $120.29 per share during regular trading hours today.