* CEO and team will give up incentive payments
* Disappointing results will speed restructuring
* Low-end hardware business on block with clients switching
(Adds comment on low-end server business, revenue figures,
By Supantha Mukherjee and Soham Chatterjee
Jan 22 IBM Corp missed revenue
expectations for the fourth consecutive quarter as the world's
biggest technology services company grappled with weakening
demand for its servers and storage equipment, particularly in
growth markets like China.
As a result of the disappointing results, Chief Executive
Officer Ginni Rometty and her team will forego their annual
incentive payments for 2013 as IBM's total revenues fell 2
percent to $99.8 billion for the year.
Total revenue for the quarter ended Dec. 31 fell 5 percent
to $27.7 billion, missing analysts expectation of $28.25
billion, according to Thomson Reuters I/B/E/S.
Hardware revenue plunged 26 percent, leading to a $750
million collapse in profit for that segment. IBM shares fell 3.5
percent to $181.68 in after-hours trade.
IBM's results are certain to accelerate the company's
"As we look forward to 2014, we will continue our
transformation," Martin Schroeter, IBM's chief financial
officer, told analysts. "We will acquire key capabilities, we
will divest businesses and we will rebalance our workforce as we
continue to return value to shareholders."
IBM, which has been expanding its higher-margin services and
software businesses over the last decade, is expected to
relinquish more of its lower-margin hardware business. Revenue
in that business, which includes server and storage products,
fell for the ninth consecutive quarter as more companies
switched to the cloud from traditional infrastructure.
'EVERYTHING BUT GROWTH'
Emerging market sales dropped 6 percent, led by China, where
IBM reported a 23 percent collapse in revenue.
A backlash against U.S. government spying in emerging
economies and a move by Beijing to encourage state-owned
companies to buy domestically-branded products contributed to
plummeting demand, some analysts said.
"Their growth markets were everything but growth," Forrester
analyst Andrew Bartels said. "They have had quite a bit of
success with sales of hardware in these emerging markets, but
these markets are not doing well. They're facing competition in
Asia-Pacific revenue fell 16 percent, while that from
Brazil, Russia, India and China fell 14 percent in the quarter.
"China is going through a very significant economic set of
reforms," Schroeter said on the earnings call. "While they have
slowed, we don't think that this opportunity has gone away."
Schroeter said that revenue in the world's second-biggest
economy, which accounts for about 5 percent of IBM's sales, will
take several quarters to recover.
"It's not going to rebound immediately," he said.
IBM's China difficulties, coupled with the company's ongoing
weakness in hardware sales, may accelerate IBM's sale of the its
low-end servers business to Lenovo Group Ltd, said
Steve Zhang, a senior technology analyst at Macquarie Bank in
Sources said IBM and China's Lenovo have revived discussions
about a sale of the company's low-end server unit, but
executives did not mention that on Tuesday.
"Theoretically, if IBM does sell is low-end hardware
business, there should be some upside because they will be able
to sell into government agencies and state-owned enterprises,"
IBM will be "on a trajectory to growth" in emerging markets
by the end of the year, Schroeter said. "We're comfortable that
we get back to mid-single digits across the growth market
regions by the end of the year."
IBM forecast that full-year 2014 adjusted profit would beat
analysts' expectations and also affirmed its 2015 target for
operating EPS of at least $20 per share.
Edward Jones analyst Josh Olson told Reuters the company
would need solid performance in software and services to meet
its target, since expectations are that hardware will not
contribute to profit in 2014.
"Assuming a normalized tax rate, this doesn't leave a lot of
room for error," he said.
NO INCENTIVE PAYMENTS
"In view of the company's overall full-year results, my
senior team and I have recommended that we forgo our personal
annual incentive payments for 2013," CEO Rometty said in a
statement. For 2013, her base pay was $1.5 million and annual
incentive payment target was $4 million.
Revenue from IBM's system and technology unit, which
includes servers and storage, fell 26.1 percent to $4.26
billion. Revenue from global technology services, its largest
business, fell 3.6 percent to $9.92 billion.
Software revenue was the only bright spot. It grew 2.8
percent to $8.14 billion in the quarter.
IBM and rivals such as Oracle and SAP are
racing to meet surging demand for web-based software products,
better known as cloud computing.
Moving to the cloud allows businesses to cut costs by
ditching bulky servers for network-based software and using
remote data centers run by technology companies.
The global cloud services market last year grew by almost a
fifth to an estimated $131 billion, according to research firm
Gartner. IBM Markets Intelligence estimates the market could be
as big as $200 billion by 2020.
Net income for the fourth quarter rose to $6.2 billion, or
$5.73 a share, from $5.8 billion, or $5.13 per share a year
earlier. It got help though from a lower tax rate of 11.2
percent in the fourth quarter, down 14.3 points from a year ago.
On an adjusted basis, it earned $6.13 per share, above
analysts' estimates of $5.99 per share.
Before its after-hours decline, the stock closed at $188.43
on Tuesday on the New York Stock Exchange. It has gained about 2
percent since it reported third-quarter results in October.
(Additional reporting by Matthew Miller in BEIJING; Editing by
Savio D'Souza, David Gregorio and Matt Driskill)