As goes revenue, so goes headcount: (3.9%) YTY so we should expect the commensurate amount of headcount reduction, but undoubtedly Ginni will just make it a nice round 5% as the math is easier for the bean counters to calculate.
By: Asa Fitch
Updated Oct. 16, 2019 5:55 pm ET
International Business Machines Corp. IBM -0.62% reported a fifth sequential quarter of falling sales, with the company’s legacy information-technology business holding back Chief Executive Ginni Rometty’s efforts to revive growth through the $34 billion acquisition of software giant Red Hat.
IBM on Wednesday reported sales of $18.03 billion, below analysts expectations and trailing the $18.76 billion it posted in the year-prior period. Shares slumped 6% in after-hours trading.
The revenue decline was IBM’s 27th overall under Ms. Rometty, who has struggled to adapt the more than century-old company to a changing global IT landscape since taking the reins in 2012.
The company’s closely watched adjusted earnings per share fell to $2.68, but came in slightly higher than analysts’ forecasts of $2.66.
Ms. Rometty, for years, has been trying to reinvent IBM, with bets on areas such as health-care technology and artificial intelligence. Cloud computing, a model where customers rent computing power instead of buying their own machines, is another cornerstone of Ms. Rometty’s bid to revive IBM’s fortunes.
While Big Blue was an early pioneer of cloud-computing services, it fell behind rivals such as Amazon.com Inc. and Microsoft Corp. IBM is the fifth largest cloud-computing company by sales, according to research firm Gartner Inc., with a 1.8% market share last year. The Red Hat deal that closed this year aims to propel IBM to a top player in the cloud.
Revenue in the company’s cloud businesses rose 11% in the third quarter to $5.0 billion, IBM said.
“Our results demonstrate that clients see IBM and Red Hat as a powerful combination,” Ms. Rometty said. IBM’s cloud growth rate still trails the increases Amazon and Microsoft have been reporting.
The company said Red Hat’s revenue increased 19% in the last quarter, the first since the deal’s close. But accounting rules limited the portion of those sales IBM was able to include in its quarterly results. IBM reported all of Red Hat’s expenses, which hurt profit.
With Red Hat, IBM hopes to gain a dominant role in what it terms “the hybrid cloud.” The company is betting that many business haven’t yet migrated their data to the cloud and that many will choose a so called hybrid model, which IBM has focused on, where data storage relies on a mix of in-house and rented computers. Red Hat sells support and training for software that aims to work seamlessly in the cloud and on-site, which IBM sees as a critical in a hybrid-cloud world.
As IBM pushes ahead with its cloud focus, it has been trying to reorient its traditional technology-services division by shedding lower-margin parts of that business, leading to lower sales. Revenue in that segment, which sells outsourced IT to companies, fell 5.7% in the third quarter to $6.70 billion, leading to the overall sales retreat.
IBM’s revenue from selling mainframes—huge computers that process transactions and manage company data and a traditional earnings mainstay for the company—also fell in the quarter. Sales of mainframes rose after IBM introduced its newest generation of them in 2017, but have fallen off in recent quarters. The company in September unveiled a new version of its mainframes, but they aren’t expected to affect financial results in a significant way until the current quarter.