International Business Machines Corp. plunged the most in more than four years as the company struggles to transform fast enough to handle the shift to cloud computing, forcing it to abandon an earnings forecast for 2015.
IBM said it will provide an update on its projections in January, ditching a five-year plan to boost profit. The shares tumbled as much as 8.4%, dragging down the Dow Jones Industrial Average as well as the value of the stake held by Warren Buffett, IBM’s biggest shareholder, who is estimated to have lost $1-billion in today’s plunge.
Warren Buffett spent $10.9 billion amassing a stake in IBM in 2011 for about $170 a share and has since added more.
Buffett Stake
In April, he told CNBC that he stood by his pick and wasn’t surprised by IBM’s revenue decline in the first quarter. He didn’t respond to a message left with an assistant today seeking comment on IBM’s latest results.
IBM’s sales to Brazil, Russia, India and China fell 7%, compared with 2% last quarter and an 11% drop in the first three months this year.
The majority of IBM’s sales, about 55% last year, comes from its services business. IBM’s backlog for services — an indicator of expected future revenue — fell 7% from a year earlier to $128 billion.
“The global services business will likely continue to see pressures given overall industry dynamics,” Maynard Um, an analyst at Wells Fargo Securities LLC, said in a note before the results. “Customers are making their projects smaller thereby creating pricing pressure. Competition remains intense.”
Stock Buybacks
As it reshapes itself, IBM still has to rely on its older global business services and software units, which together make up about three-quarters of sales. To boost earnings in the meantime, Rometty has raised debt to fund share buybacks, laid off workers and reduced the company’s tax rate.
IBM has about $1.4 billion remaining in its current share repurchase authorization and said it will request additional funds for buybacks at its October board meeting.
Rometty has made a concerted effort to offload less profitable businesses — like the low-end server unit that Lenovo Group Ltd. agreed to buy for $2.1 billion. After clearing regulatory hurdles, that deal closed on Oct. 1.
IBM fell 7.3% to $168.83 at 9:34 a.m. New York time. The drop of as much as 8.4% earlier was on track for the biggest dip since 2002 on a closing basis.
The stock had fallen 2.9% this year through last week, compared with a 1.2% dip in the Dow Jones Industrial Average.
Buffett spent $10.9 billion amassing a stake in IBM in 2011 for about $170 a share and has since added more. The investment was a departure for the billionaire, who has long said that he avoided buying technology stocks for Berkshire Hathaway Inc. because it was hard for him to understand their business plans and forecast their prospects.
Third Quarter
Third-quarter adjusted earnings from continuing operations were $3.68 a share, down from $4.08 a year earlier. Including the loss from discontinued operations, the company had profit of 2 cents a share. Revenue fell 4% to $22.4 billion, the 10th straight quarterly drop, weighed down by declines in its hardware division and in emerging markets.
Analysts at Stifel Nicolaus & Co. and BMO Capital Markets, among others, had been calling for IBM to abandon its five-year financial roadmap.
David Grossman, an analyst at Stifel, wrote in a note last week that while he thought it was possible for IBM to reach the target, he was skeptical about its utility.
“We do question whether the roadmap remains relevant in the current environment and wonder whether it would be in the company’s longer term interests to abandon it and modify the way they provide guidance,” Grossman wrote.
Cloud Unit
Cloud offerings delivered as a service are now at an annual run rate of $3.1 billion, compared with $2.8 billion as of the second quarter. That’s still a fraction of IBM’s total $100 billion in revenue last year.
IBM reduced its forecast for free cash flow to $12 billion to $13 billion this year, down from a projection for $16 billion a quarter ago. The company also plans to cut more jobs, resulting in a fourth-quarter charge of as much as $600 million.
Globalfoundries Deal
The Armonk, New York-based company now expects 2014 operating earnings per share to fall 2% to 4% from $16.64 in 2013. That reflects changes for the chipmaking unit, which is now classified as a discontinued operation. IBM is taking a third-quarter pretax charge of $4.7 billion for the business. The company had been projecting 2014 adjusted earnings of at least $18 a share.
