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Disappointed IBM Takes Drastic Action Amid Significantly Slower Customer Spending

IBM is abandoning its financial goals for 2015 as significantly slower customer spending impacts its revenue.

Big Blue on Monday reported its third-quarter revenue fell from $23.3 billion a year ago to $22.4 billion. Analysts were counting on $23.37 billion. Net profit from continuing operations dropped from $4.14 billion to $3.46 billion. The company’s own CEO took a dim view of the results.

“We are disappointed in our performance,” Ginny Rometty said in a prepared 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.”

As a result, IBM is selling its semiconductor operations to GlobalFoundries. That deal is worth $1.5 billion and is expected to close next year. IBM also will take a $4.7 billion charge. Further, 103-year-old Big Blue is preparing for layoffs, although it is not saying how many people could be impacted.

The results and subsequent actions come as IBM tries to compete in software and the cloud against the likes of Amazon. Here’s how BloombergBusinessweek’s Nick Summers sees the situation:

“One question is whether IBM has the technical chops to compete with Amazon and others: After losing a lucrative CIA cloud project to the upstart, IBM had to acquire a small competitor, SoftLayer, to competently provide the services its customers are now demanding. The arrival of cheap cloud computing means that corporations don’t need IBM’s big, expensive mainframes. And even if IBM does catch up, the cloud might be such a thin-margined industry that it can’t sustain the profit margins IBM had been telling investors to expect. Until today.”

On a similar note, Daniel Ives, an analyst at FBR Capital Markets, wrote in a client memo today that IBM needs to make some big changes. The company “needs to find success and growth in the cloud through organic and acquisitive means. Otherwise there could be some darker days ahead for the tech giant and its investors.”

Rometty said she’s working on that.

“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,” she said in a press release. “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.” 

Whether investors are convinced that will work remains the question. On Monday morning, IBM saw its worst sell-off in four years and the company’s shares closed down 7.11 percent to end at $169.10.

 


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