International Business Machines’ (IBM) third-quarter results, announced this week, were so bad even its management was shocked.
Chief executive Ginni Rometty revealed she was disappointed with the company’s performance.
To investors, what’s more discouraging is that IBM has suspended its earnings target of US$20 per share in fiscal year 2015, which prompts them to ask whether they should remain patient or just walk away.
Post-results, the share price has dropped over 11 percent.
There are at least two reasons behind the group’s weak performance.
In recent years, IBM has been restructuring its businesses in what it calls “relentless reinventions”.
It sold its low-end server business to Lenovo Group Inc and its chip-making business to Globalfoundries. Both units had been dragging down profits.
Meanwhile, it has been focusing on its cloud computing and mobile operations.
The group has turned its former enemy, Apple, into its business partner. The two companies are co-developing and marketing mobile applications for business.
The cloud computing and mobile units are growing fast. Revenue from cloud services that let companies buy software was up 50 percent while mobile revenue doubled in the year to date.
However, the growth in these new star businesses failed to offset the negative impact from existing businesses that are losing competitiveness.
To address these issues, Rometty is changing IBM.
But the tech giant, like the legendary Titanic, is too big to turn around swiftly.
On the “unsinkable” Titanic, even though a sailor noticed an iceberg ahead and the captain changed course right away, time ran out before the ocean liner could steer clear of the iceberg.
IBM is caught in a similar situation. Its management had seen the problems and the company has gone through a significant transition, but it cannot avoid the “rocky time”, according to Rometty.
Some analysts also questioned IBM’s lavish stock buybacks to support its share price.
IBM spent US$13.5 billion to repurchase stocks in the first nine months of the year, more than double its net income during the same period.
The move has severely weakened its balance sheet and drained its free cash flow.
Shouldn’t IBM have invested in promising new technology instead of using such a large chunk of money to buy back shares?
Was it hoping to please its shareholders?
If that is the case, it would be an epic failure.
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