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IBM Stock Slides 4% Amid Lower Revenue -- WSJ

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04/18/2019 | 02:48am EDT

By Patrick Thomas

International Business Machines Corp.'s shares were off more than 4% Wednesday after the company posted a third consecutive quarter of declining revenue, raising concerns about its turnaround and its ability to compete in the crowded cloud market.

In its latest quarter, growth was flat or declined in all of IBM's main reported lines of business, including cloud services and information-technology-support services. Net income fell 5.2% to $1.59 billion.

Analysts were largely disappointed in IBM's top-line decline, but many were still optimistic the computing giant is on track with investing in faster-growing parts of its business.

IBM has struggled to compete in the modern computing era as the rise of cloud giants such as Amazon.com Inc. and Alphabet Inc.'s Google have challenged an old model where big companies handled their critical computing needs largely in-house. IBM sees promise in the so-called hybrid cloud -- the idea that companies will increasingly use a combination of cloud services and their own equipment to accomplish those tasks -- and aims to expand that business.

"We had strong performance in offerings that helped clients with their digital transformations and journeys to cloud," Chief Financial Officer James Kavanaugh said during a conference call with analysts on Tuesday. "At the same time, we continue to take actions to optimize our portfolio while investing to lead in the emerging, high-value areas of the IT industry."

Since taking over in 2012, Chief Executive Ginni Rometty has poured resources into cloud computing and new technologies such as artificial intelligence, to shift away from traditional growth engines such as equipment sales and IT services that haven't been growing as rapidly.

"While the headline revenue miss will be positioned negatively by most, we continue to believe the underlying fundamentals are stable to improving," analysts at Stifel said in a research note.

Goldman Sachs analysts said they were encouraged by IBM's results, but added that investors remain skeptical of the company's ability to sustain improvements. Cloud revenue accounted for one-quarter of IBM's total revenue over the past 12 months, up from 22% a year earlier, an IBM representative said.

Shares in IBM fell 4.2% to $139.11 on Wednesday. The stock is down 14% over the past year.

IBM's year-over-year revenue had fallen in virtually every quarter since Ms. Rometty took over until the last quarter of 2017. The company also posted revenue growth in the first half of last year, but that turnaround proved short-lived: Revenue declined again in the last two quarters of 2018.

"IBM remains challenged to grow its top line outside of mainframe cycles, " Bernstein analysts said in a note, adding that the company typically launches a new mainframe system every 2 1/2 years.

IBM is aiming to bolster its hybrid-cloud strategy through the company's acquisition of Red Hat Inc., an open-source software and services company that helps businesses streamline their computing strategies as they grow. The deal, expected to close in the second half of this year, is IBM's largest acquisition to date and is valued at roughly $33 billion.

Some analysts say the company needs to show consistent growth before Wall Street believes the deal supports a turnaround narrative.

"IBM's story remains a work in progress, especially in terms of stability and consistency, which we believe, management needs to address before the pending RHT (Red Hat) acquisition closes," analysts at Wedbush said in a note.

Corrections & Amplifications Shares of IBM have fallen 14% over the past year. An earlier version of the article incorrectly said shares fell 14% this year. (April 17, 2019)

Write to Patrick Thomas at Patrick.Thomas@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
ALPHABET 0.49% 1238.75 Delayed Quote.18.55%
INTERNATIONAL BUSINESS MACHINES CORPORATION 0.53% 142.97 Delayed Quote.25.78%
VALUE8 N.V. 0.36% 5.56 Delayed Quote.17.30%
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