IBM Profit Margins Shrink Again From Shift to Cloud Computing

Chairwoman and CEO of IBM Ginni Rometty speaks onstage at the FORTUNE Most Powerful Women Summit in 2013 in Washington, DC. (Photo by Paul Morigi/Getty Images for FORTUNE)

(Bloomberg) — International Business Machines Corp. said profit margins shrank for the fourth quarter in a row, underscoring the technology company’s challenge in shifting to more subscription-based software and cloud services.

Key Points

  • Operating gross profit margin in the third quarter was 48 percent, down 2.1 percentage points from the same period a year earlier. This missed the average analyst estimate of 50.1 percent.
  • Sales were $19.23 billion, down 0.3 percent from the previous year, beating the average analyst estimate of $19 billion. While this is the closest IBM has gotten to revenue growth in more than four years, it’s still the 18th quarter of sales declines.
  • Profit, adjusted for certain items, was $3.29 a share, better than the average analyst estimate of $3.23, according to estimates compiled by Bloomberg.
  • The strategic imperatives group — which includes businesses such as artificial intelligence, cloud computing and data analytics — reported revenue of $8 billion in the quarter, up 16 percent from a year earlier.
  • IBM shares fell 3.5 percent in extended trading to $149.31. They closed little changed at $154.77.

See also: Cloud by the Megawatt: Inside IBM’s Cloud Data Center Strategy

The Big Picture

Since Chief Executive Officer Ginni Rometty took the top post in 2012, investors have been waiting for her to turn the computer services company around and find growth in the newer businesses — like cloud and artificial intelligence — to offset declines in the legacy hardware, software and services units. The move is taking longer than some investors would like. During the transition, IBM has had to spend more on infrastructure and development, which Chief Financial Officer Martin Schroeter said dented profitability this quarter.

“We have some pretty heavy investment levels going into the cloud and cognitive businesses, and we’ll continue to make those,” Schroeter said in an interview. “Between mix and investments, that covers the bulk of more than three-quarters of the margin impact in the quarter.”

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