IBM Sales Slump Prompts Top Executives to Forgo Bonuses

January 22, 2014 Leave a comment

IBM Sales Slump Prompts Top Executives to Forgo Bonuses

International Business Machines Corp. (IBM), 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 today in a statement. That missed the $28.3 billion projected by analysts, 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.

IBM’s shares fell as much as 4.2 percent to $180.50 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.

Profit Goals

Even so, the company exceeded profit estimates 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 today 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.

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 today 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 today.

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

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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