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Revenue down 2% but IBM sales top estimates

Published July 17, 2014 6:06 pm

Earnings • Results improving as IBM adapts to industrywide shift to "the cloud."
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New York —IBM Corp.'s sales topped analysts' estimates, getting Chief Executive Ginni Rometty closer to her profit goals.

While revenue fell 2 percent from a year earlier to $24.4 billion in the second quarter, the declines were smaller than in the prior three-month period for mainframe servers and sales in developing countries, IBM said Thursday.

The result surpassed the $24.1 billion that analysts projected on average, according to data compiled by Bloomberg. Adjusted earnings rose to $4.32 a share.

Rometty is banking on a strong second half of the year to hit her targets for the company's performance even as IBM adapts to an industrywide shift to cloud computing. The company reiterated its projection for 2014 adjusted earnings of at least $18 a share this year.

IBM is contending with technology customers that increasingly seek to store data and software on cloud-computing networks, rather than on site. That's limited clients' need for IBM's servers and mainframes, making it more difficult to reach profit targets. The company had said before Thursday that it expected mainframe sales to improve into next year.

IBM aims to reach $20 a share in adjusted earnings by 2015, up from $11.67 in 2010 — a pledge instated by former Chief Executive Sam Palmisano and sustained by Rometty, who succeeded him in 2012.

IBM shares rose as much as 2.8 percent in late trading.

To meet this year's projections, Chief Financial Officer Martin Schroeter said in April that IBM would be 38 percent toward its profit goal by the end of the second quarter, That implied second-quarter earnings this year of $4.21 to $4.39 a share, compared with the $4.32 a share reported Thursday.

As she tries to navigate the company through the industry's changes, Rometty has shifted IBM's own focus to cloud services, along with data analytics, in which the company helps clients mine the digital information they collect to identify trends. Rometty has also tried to offload less profitable businesses - like the low-end server unit that Lenovo Group agreed to buy for $2.3 billion, pending a U.S. national-security review.

In a deal unveiled this week, IBM will help develop more than 100 mobile-centric applications for businesses catered to Apple's iPhones and iPads to help workers do more with the devices than check email or calendars. The companies foresee corporate customers increasingly using handheld devices for daily workplace tasks like supply chain management and human resources functions.

Separately, IBM is spending more than $1 billion to create a new group around its Watson technology, which lets customers use plain English to analyze large troves of data. To remake its cloud business, Rometty bought provider SoftLayer Technologies Inc. in 2013 for $2 billion and this year committed an additional $1.2 billion to bolster its data centers and offerings.

"Their success is going to be tied to the cloud over the next five to 10 years," said Daniel Ives, an analyst at FBR Capital Markets. "It's more of a strategic focus of the company."

Cloud offerings delivered as a service are now at an annual run rate of $2.8 billion, compared with $2.3 billion as of the first quarter. That's still a fraction of IBM's total $100 billion in revenue last year.

As it reshapes itself, IBM will still have 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 also sold debt to fund share buybacks, laid off workers and slashed the company's tax rate.




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