Bloomberg News

IBM’s Executives Forgo Bonuses After Seventh Straight Sales Drop

January 22, 2014

IBM's SoftLayer Data Center

A server build technician stands at a work bench while monitoring a clients data and performing maintenance inside pod two of International Business Machines Corp.'s SoftLayer data center in Dallas, Texas, on Jan. 16, 2014. Photographer: Ben Torres/Bloomberg

International Business Machines Corp. (IBM:US), the world’s biggest computer-services provider, reported a seventh straight quarterly sales decline amid plunging demand for servers, prompting top executives to forgo annual bonuses.

Revenue fell 5.5 percent to $27.7 billion in the fourth quarter, the Armonk, New York-based company said yesterday in a statement. That missed the $28.3 billion projected by analysts (IBM:US), according to data compiled by Bloomberg.

Technology buyers are increasingly storing data and software on cloud-computing networks, rather than onsite, limiting their need for servers, mainframes and other hardware. To cope, Chief Executive Officer Ginni Rometty is offering more cloud services, eliminating jobs and divesting lower-margin businesses. Though these efforts are making progress, last year’s results led Rometty to opt against bonuses, she said.

“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,” she said yesterday.

IBM’s shares fell 2.6 percent to $183.55 in late trading after closing at $188.43 in New York. The stock declined 2.1 percent in 2013, making it the only loser in the Dow Jones Industrial Average.

Even so, the company exceeded profit estimates (IBM:US) last quarter, helped by the cost cutting and software growth. Excluding some items, earnings climbed to $6.13 a share, IBM said. Analysts had estimated $6 on average. The company, which is targeting adjusted earnings of $20 a share by 2015, said yesterday that it remains on track to reach that goal. IBM projected at least $18 a share in operating earnings for 2014, in line with estimates.

Lenovo Sale

IBM is negotiating a sale of its low-end server business to Lenovo Group Ltd., according to a person with knowledge of the deal. The deal, which would make IBM less reliant on hardware revenue, may be signed within weeks, the person said.

In the meantime, the company has sought to boost efficiency by cutting jobs. IBM said yesterday it expects to post about $1 billion in “workforce-rebalancing” costs in the first quarter, following a similar charge last year.

IBM also faces a management transition: Chief Financial Officer Mark Loughridge, the longest-serving CFO in the company’s 103-year history, retired at the end of 2013. That puts IBM’s profit goals under the purview of his successor, Martin Schroeter.

Hardware Issues

“We continue to position our business for the long term, while dealing with some significant business model issues in hardware,” Schroeter said on a conference call yesterday.

Rometty, 56, is seeking to benefit from a shift to cloud services, which are delivered online rather than via local computers. Cloud revenue rose 69 percent last year to $4.4 billion. Still, the transition has brought a new crop of competitors and eroded demand for traditional hardware. Revenue from IBM’s systems and technology business, which sells mainframes, servers and other hardware, fell 26 percent to $4.26 billion in the fourth quarter.

The company also is struggling to increase revenue in emerging economies. Sales from so-called growth markets fell 9 percent last quarter, following another decline in the previous period.

“They have to create different products and services that can start to get them market share,” Ivan Feinseth, chief investment officer at Tigress Financial Partners, said in an interview. He has a neutral rating on the shares. “That’s where the growth will come from.”

SoftLayer Deal

In her biggest acquisition since taking over as CEO two years ago, Rometty bought cloud-computing storage company SoftLayer Technologies Inc. in 2013 for about $2 billion. Now IBM is upping its bet with a plan to invest $1.2 billion in the cloud-services business this year, the company said last week.

The move follows IBM’s announcement this month of a new business division around its Watson supercomputer, which can analyze large volumes of data and answer questions in conversational language. IBM will invest more than $1 billion in the unit and set up its own headquarters in New York. Watson’s big-data services, which let customers mine vast troves of information, will be run on SoftLayer’s cloud.

While IBM plans to focus more on SoftLayer and Watson, the company may encounter challenges in meeting is earnings goals, Maynard Um, an analyst at Wells Fargo & Co., said in a note to investors. He has a neutral rating on the shares.

“It has faced some macro and execution challenges and, in our view, has fewer levers to drive EPS without revenue growth,” he said.

To contact the reporter on this story: Alex Barinka in New York at abarinka2@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net


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Companies Mentioned

  • IBM
    (International Business Machines Corp)
    • $188.0 USD
    • 0.30
    • 0.16%
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