IBM Turnaround Questioned on Slow Growth of New Businesses

(Bloomberg) --IBM’s one-quarter growth streak is already in doubt.

Shares of the technology company fell in early trading after it reported narrower profit margins and no revenue growth, excluding help from a weak U.S. dollar. That cast a shadow over an effort to sell more-profitable cloud-based software to revive growth after five years of revenue declines.

Though 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 $19.1 billion, beating the average analyst estimate of $18.8 billion. That’s 5 percent higher than a year earlier, but flat without currency fluctuations. Margins slipped 0.6 percentage points to 43.2 percent. Earlier this year, Chief Financial Officer James Kavanaugh said margins would stabilize “immediately” in the first quarter.

The stock dropped as much as 5.6 percent in early trading Wednesday after closing at $160.91 in New York.

Growth in the cloud business was 14 percent, lower than the 2017 average of 24 percent, Bloomberg Intelligence analyst Anurag Rana said. That “puts a question mark on IBM’s hybrid cloud strategy,” he added.

During a conference call, 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.

Kavanaugh described the overall picture as positive and said Chief Executive Officer Ginni Rometty’s goal of getting about half of sales, or $40 billion, from newer businesses was ahead of schedule.

“This is a good start to the year,” Kavanaugh said. “We’re well on pace to deliver that $40 billion earlier than 2018.” Those new businesses represented 47 percent of revenue over the last 12 months, he noted.

Rometty reversed the trend of revenue declines late last year, though that boost wasn’t fueled 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, Rometty has shifted thousands of jobs outside the U.S. and reduced costs.

On average, analysts expected IBM to lift its full-year profit forecast, but the company kept it at $13.80 a share.

Armonk, New York-based IBM said adjusted earnings per share were $2.45 in the quarter, up 4 percent from a year earlier. Analysts were expecting $2.42 a share on average, according to data compiled by Bloomberg.

Some investors aren’t waiting around to see if Rometty can return Big Blue to its glory days as one of the tech industry’s bellwethers. Warren Buffett, who plowed more than $10 billion into the company in 2011, exited his position almost completely in recent months.