IBM hits 5-year low as outlook falls short

Disappointing profit forecast underscores struggle to offset declining software division

IBM fell to the lowest price in more than five years after its 2016 profit forecast fell short, underscoring the company’s struggle to offset a persistent decline in its traditional hardware, software and technology-services business.

IBM tumbled 4.9 per cent to $121.86 (U.S.) at the close in New York, the lowest price since July 2010. It was the biggest drag on the Dow Jones Industrial Average, which fell 1.6 per cent Wednesday.

International Business Machines Corp. is in the midst of a multi-year transition that has weighed on the stock. CEO Ginni Rometty is working to drive growth by focusing on newer operations, including cloud computing and data analytics, trying to counter investor concerns about revenue by emphasizing the new businesses are higher in value and more profitable. While sales of new services, bundled together under the heading “strategic imperatives,” increased 16 per cent to $28.9 billion in 2015, the company forecast profit this year far below analyst estimates.

Operating earnings will be at least $13.50 a share in 2016, chief financial officer Martin Schroeter said Tuesday. That’s less than the $15 a share predicted by analysts. Currency fluctuations will affect operating earnings by more than $1 a share, he said.

“While IBM materially lowered the bar on EPS, the company’s tone on its conference call was surprisingly (perhaps worrisomely) upbeat,” Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co., wrote Wednesday. “We worry that the bar is simply not low enough.” He has the equivalent of a hold rating on the stock.

Another particular area of concern: software’s continued weakness. In the fourth quarter, software sales fell 11per cent to $6.8 billion. A surprising drop in third-quarter revenue from transactional software — defined as one-time purchases — was one reason IBM lowered its 2015 forecast in October. The decline in transactional software sales continued in the fourth quarter, which had a larger effect on total software revenue, Schroeter said on a call with analysts.

In April, Schroeter said IBM’s annual profit forecast hinged on the ability of the software division to stop shrinking. The company reported that 2015 software sales declined 9.8 per cent to $22.9 billion, and gross margins also shrank.