International Business Machines Corp. abandoned a longtime earnings target seen as a test of its turnaround plans and reported sharply lower third-quarter profit on surprising softness in three of its major businesses.
The Armonk, N.Y., company on Monday acknowledged it won’t meet a goal of earning at least $20 a share next year, a forecast it has stood by for five years under two chief executives.
IBM also unveiled a deal under which it will pay chip maker Globalfoundries Inc., which is owned by Abu Dhabi investment entities, to take its unprofitable semiconductor operations off its hands.
Chief Executive Virginia Rometty said “our results this quarter were disappointing” while noting IBM experienced a marked slowdown in September in customer buying, and declines in revenue and profit point to an unprecedented pace of change in the technology industry.
“We’ve got to reinvent ourself like we’ve done in prior generations,” Ms. Rometty said during a conference call with investors.
Its shares fell by as much as 8.4% in early trading, hitting a three-year low, and were recently off 7% at $168.79. IBM’s drop helped to push the Dow Jones Industrial Average lower.
Associated for decades with large computer systems, IBM has been focusing on more profitable computing services and software businesses in recent years. But Big Blue and other old-line technology leaders have been struggling to reignite growth, as information-technology spending is shifting from IBM’s traditional customer base to younger companies that spend less money on services and brand-name hardware.
Under previous Chief Executive Samuel Palmisano, the company had pledged in May 2010 to double its earnings to at least $20 a share by 2015 by more aggressively pursuing business in software and high-growth emerging markets.
However, skepticism about the company’s ability to make the goal has grown in recent quarters. IBM has been stressing hot software areas like data analytics and cloud-style outsourcing services. But those businesses face stiff competition, and haven’t been able to offset slowdowns in hardware and older kinds of computing services.
“IBM is selling the services for the old-school Humvee when customers are buying Teslas,” said Daniel Ives, an analyst at FBR Capital Markets. “The market is evolving and IBM needs to change their strategy accordingly.”
IBM plans to offer a new 2015 forecast in January.
The company also hinted it may cut back on the massive share buyback program that helped support its earnings targets. In the third quarter, IBM bought back $1.7 billion in stock. The company had $1.4 billion remaining under its current repurchase authorization at the end of September and said it would ask to boost that figure at this month’s board meeting.
IBM, which has failed to generate a revenue increase for 10 straight quarters, had been scheduled to report results after markets closed on Monday. But the company put out an advisory Sunday saying it would announce significant news Monday and accelerate its earnings release.
IBM’s plan to divest its semiconductor operations, a big factor in the company’s third-quarter profit decline, is an acknowledgment that the rising cost of chip making is too burdensome. Though IBM was a pioneer in advancing semiconductor technology, its manufacturing capability fell behind others that produced chips in large volume.
Under the deal with Globalfoundries, IBM will pay the semiconductor company $1.5 billion to take over chip manufacturing operations, which will continue to produce processors used in IBM systems. It also took a $4.7 billion charge to earnings for the divestiture.
The deal will transfer about 5,000 IBM employees to Globalfoundries, a chip manufacturing service with a big factory near Albany, N.Y., that is controlled by investors associated with the government of Abu Dhabi. IBM stressed that it will continue to invest heavily in research to advance basic semiconductor technology, sharing that technology with Globalfoundries as a key supplier of microprocessor chips used in IBM server systems.
“We now have a safe, secure supply in our own backyard of these processors,” said John Kelly, an IBM senior vice president and research director, in an interview. “We would not have done this had we not been able to find a trusted partner.”
Globalfoundries will take over IBM facilities in East Fishkill, N.Y., and near Burlington, Vt. CEO Sanjay Jha said its Burlington plant is running at full capacity serving customers for specialized products used for wireless devices. He said the IBM plants and technology specialists Globalfoundries is acquiring, besides serving IBM’s needs, should help address an emerging category of connected devices called the Internet of Things.
The two executives said the payments from IBM–rather than Globalfoundries paying for the assets–reflect costs that company will incur in adapting facilities to serve IBM’s future needs. “We wanted to make sure that Globalfoundries was positioned for success,” Mr. Kelly said.
IBM’s other moves to reduce its reliance on hardware include a deal with Lenovo Group Ltd. to purchase a business selling commodity-style servers that use chips from Intel Corp. That deal closed in early October.
In all, Ms. Rometty said IBM has divested three businesses this year that generate $7 billion but have contributed $500 million in losses. They represented “empty calories, as some of my investors would say,” she said.
Most new computing installations use Intel-powered servers, but the business is highly competitive and has produced little profit for IBM. The company has chosen to focus efforts in hardware on mainframe systems, along with a high-end line of servers that use internally developed chips using a technology called Power. Neither did well in the third period.
Total revenue from IBM’s systems and technology segment, which includes the company’s computers and semiconductor operations, declined 15%. Revenues from mainframes were off 35%, while Power systems fell 12%.
Services, the company’s biggest business, also fared poorly. Revenue from IBM’s global business services segment fell 2.9% from the year-earlier period. Software revenue fell 1.6%.
In all, IBM reported net income for the quarter ended Sept. 30 of $18 million, or 2 cents a share, compared with profit in the year-earlier quarter of $4.04 billion, or $3.68 a share. Revenue fell to $22.4 billion from $23.3 billion a year earlier.
IBM said profit excluding items such as acquisition-related charges and retirement-related costs came to $3.68 a share. Analysts had expected earnings on that basis of $4.31 on revenue of $23.37 billion.
Chelsey Dulaney contributed to this article.
Write to Don Clark at email@example.com
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