World and Nation

Amid a shift in strategy. IBM reports weak earnings

After IBM reported surprisingly weak quarterly profits and sales Monday morning, Virginia M. Rometty did something most unusual for an IBM chief executive. She joined the conference call with analysts, and forcefully made the case for investing heavily in new fields that promise growth in the future, despite a near-term financial setback.

“We are reinventing and we are managing this company for the long term,” Rometty told the Wall Street analysts. Sure, she acknowledged, the third-quarter results were “disappointing,” and she underlined the need to pick up the corporate pace in the midst of “unprecedented change” in the technology industry.

But Rometty insisted that IBM’s “very bold moves” since she became chief executive nearly two years ago — multibillion-dollar spending programs for data analysis software and skills, cloud computing and Watson artificial-intelligence technology — were the right ones.

“The strategy is correct,” she said. “Now it’s our speed of execution that needs to improve.”

IBM, like the entire tech industry, is going through a significant transition, which is a threat as well as an opportunity. It’s a point Rometty has made recently; in an interview earlier this year, she said 2014 would be a “rocky time” given the challenges.

But IBM’s third-quarter performance brought even more attention to its particular financial struggles, as new businesses that are growing are not yet large enough to offset the weakness in its traditional hardware, software and services lines.

The quarterly results came in well below the forecasts of Wall Street analysts, and they caught IBM executives off-guard as well. In the conference call, Martin Schroeter, IBM’s chief financial officer, conceded that the industry was shifting “faster than we had planned.”

As a result, IBM said it was abandoning its financial target for 2015 of delivering earnings per share of $20 or more.

The company’s stock price dropped over 7 percent, down $12.95, to close at $169.10 a share.

The industry transition that is buffeting IBM includes the move to deliver software as a service from remote, or cloud, data centers and the use of new kinds of less expensive software and hardware to store and analyze huge amounts of data. These are growth businesses for IBM, but they also are a shift away from the traditional software and services businesses, which have been IBM’s lucrative mainstay.

Steven Milunovich, an analyst at UBS, estimates that traditional hardware, software and services products make up two-thirds of IBM’s revenue.

“IBM is in the midst of a multiyear transition that is unavoidable,” Milunovich said. “But when you have this much change, it is very tough on legacy businesses.”