IBM’s Surprise Earnings Miss

The latest Gartner Worldwide IT Spending Forecast projects worldwide IT spending to grow 4.1% over the year to $3.8 trillion during the current year. These projections are a marginal improvement over the projections a quarter ago, when Gartner estimated IT spending to grow to $3.7 trillion this year. IT spending is projected to grow another 4% next year to $3.9 trillion.

IBM’s Financials
IT giant IBM (Nasdaq:IBM) normally does not miss market expectations. But this was a troubling quarter for the company, which missed targets for the first time since 2005. Revenues for the year fell 5% over the year to $23.4 billion, falling short of the market’s projections of $24.6 billion. EPS improved 3% to $3 but was short of the Street’s target of $3.05 for the quarter. IBM attributed the missed revenues to failure to close big deals and miss on the earnings to the deterioration of the yen, which hurt earnings by $0.07 per share.

By segment, revenues from technology services fell 4% over the year to $9.6 billion. Business services revenues fell 3% to $4.5 billion, and software revenues remained flat at $5.6 billion. Hardware revenues reported the biggest decline at 17% to $3.1 billion.

For the current year, IBM maintained earnings guidance of at least $16.70, short of the Street’s target of $16.77.

IBM’s Margin Improvement Initiatives
To improve margins, IBM plans to sell their low-end server division in the next few quarters. The deal is expected to be worth $2.5 billion-$4.5 billion. Analysts expect that Lenovo may be the most interested in purchasing the division.

In addition, IBM is continuing with their headcount reduction plans and will be spending $1 billion in the current quarter on account of reducing jobs. After announcing several rounds of layoffs over the past two years, the company is now looking to restructure their overseas employees and will be laying off 1,200-1,400 employees in France over the next two years.

IBM is also focusing on expanding into high-value services such as mobile phone security and data analysis. Recently, they released IBM MessageSight, a new appliance that will help organizations with the management and communications of mobile devices and sensors that are present in multiple locations such as vehicles, smart buildings, and household appliances and comes with an ability to handle high volumes of messaging.

Recently, IBM acquired Cleveland, Ohio–based UrbanCode, an automated software delivery company. UrbanCode automates the delivery of software to organizations, thus helping businesses to release and update mobile, social, big data, cloud applications. Through their service, businesses are able to deploy software or application updates within a short time of their release. IBM plans to leverage UrbanCode’s abilities with their SmartCloud and MobileFirst initiatives by offering their clients the ability to deliver faster updates and releases through these channels.

IBM’s stock is trading at $203.32 with a market capitalization of $225.43 billion. It touched a 52-week high of $215.90 in March of this year.