IBM Profit Slumps As Tech Services Struggles

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Big fall in profits at Big Blue as tech services division declines, as does IBM’s systems division

IBM has disappointed Wall Street after reporting a decline in both profits and revenues for its third quarter.

And to make matter worse, Big Blue missed analyst expectations on a couple of metrics, which resulted in a 5 percent decline in its share price in extended trading.

Chairman, president and chief executive officer Ginni Rometty is following a policy that sees IBM shrinking “by design”, as part of its refocusing on the cloud and analytics.

Cloud focus

That said, IBM last year spent $34bn to acquire open source cloud giant Red Hat to reinvigorate its cloud growth.

For the third quarter ending 30 September, IBM posted a net profit of $1.67bn, down from $2.69bn a year earlier.

Revenues fell 3.9 percent to $18bn from $18.7bn in the same year-ago quarter, and missing analysts’ average estimate of $18.22bn.

“In the third quarter, as we continued to help clients with their digital reinventions, we grew revenue in our Cloud & Cognitive Software segment and in Global Business Services,” said Rometty.

“Our results demonstrate that clients see IBM and Red Hat as a powerful combination and they trust us to provide them with the open hybrid cloud technology, innovation and industry expertise to help them shift their mission-critical workloads to the cloud,” she added.

But digging down into IBM’s financials, it is clear that some of its divisions performed better than others.

There was a rise in revenue from the Cloud and Cognitive Software division to $5.28bn, and Business Services a modest rise to $4.1bn.

But revenue at the technology services division fell 5.6 percent to $6.7bn, and systems revenue also fell to $1.48bn.

Reuters quoted CFO James Kavanaugh as saying on a post-earnings call that sales from global technology services were weighed down by lower client business volumes, mainly in the UK and Germany.

After a down-cycle, IBM reportedly expects mainframe business to return to a normal product cycle in the fourth quarter.

Legal action

IBM is currently involved in an age discrimination lawsuit in the US, and recently Rometty was ordered by a US Federal judge to hand over memos and communications.

Big Blue in the past has been accused of allegedly flouting rules against age bias, and axing mostly older staff and moving jobs overseas.

That legal actions comes after in-depth report by ProPublica and Mother Jones in March 2018 alleged that IBM had a systematic strategy of pushing out Big Blue staffers aged 40 and upwards, and replacing them with younger, and cheaper employees.

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Author: Tom Jowitt
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