IBM's Financial Struggles Continue in Q3 2014

Revenues fell in hardware, software and services, and the company is working to reinvent itself by focusing on higher-value business and divesting other segments.

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IBM continued on its course of trying to move to higher-value business as its sales in more traditional sectors continue to drop.

On its third-quarter earnings call, IBM spoke in terms of "continuing operations," meaning operations of the parts of the company not being divested. Third-quarter net income from continuing operations was $3.5 billion, compared with $4.1 billion in the third-quarter of 2013, a decrease of 17 percent.

Meanwhile, total third-quarter revenues from continuing operations of $22.4 billion were down 4 percent from the third-quarter of 2013.

The company also announced the divestiture of its semiconductor business to GlobalFoundries, a deal that will have IBM paying GlobalFoundries $1.5 billion over three years as Big Blue also continues its previously announced $3 billion investment over five years for semiconductor technology research to lead in the next generation of computing. The agreement with GlobalFoundries will enable IBM to further focus on fundamental semiconductor research and the development of future cloud, mobile, big data analytics and secure transaction-optimized systems.

"We are disappointed in our performance," Ginni Rometty, IBM chairman, president and CEO, said in a statement. "We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry. While we did not produce the results we expected to achieve, we again performed well in our strategic growth areas—cloud, data and analytics, security, social and mobile—where we continue to shift our business. We will accelerate this transformation.

"We are executing on a clear strategy that is moving IBM to higher value, and we've taken significant actions to exit nonstrategic elements of the business. This includes the announcement that we will divest semiconductor manufacturing to focus on research and development that will differentiate our systems. We will continue to make the investments and the changes necessary to manage our business for the long term. And we remain fully committed to returning significant value to shareholders through dividends and share repurchase."

Meanwhile, uncharacteristically joining Martin Schroeter, IBM senior vice president and chief financial officer, on the company's earnings call, Rometty, assured financial analysts that IBM is properly positioning itself for a turnaround. "We are managing this company for the long term," she said. "Our company is fundamentally better positioned than a few years ago."

Asked by one analyst why this time should be any different than other moves IBM has made to right itself—including workforce reductions and divesting lower-value businesses—Rometty spelled out the strategic investments IBM has made over the past year, including the $1.2 billion investment to build up SoftLayer, the $1 billion investment in Watson with the IBM Watson Group, and the $1 billion investment in the Bluemix platform-as-a-service, among others. Rometty also cited recent deals struck with Apple and SAP in the mobile and cloud spaces, respectively.

Yet, revenues from IBM's typically strong sectors saw a downturn in the quarter. Revenues from the software segment were $5.7 billion, down 2 percent from the third-quarter of 2013. And revenues from IBM's key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $3.7 billion, down 1 percent.