Long before Microsoft (MSFT), Apple (AAPL) and Google (GOOG) were a twinkle in their founders' eyes, International Business Machines (IBM) was synonymous with technology for most people. These days, IBM is struggling to stay relevant in the rapidly changing tech market.
Big Blue's shares got bashed on Tuesday, closing 5.75 percent lower, or $8.58, to $140.64 as Wall Street reacted to the company's latest disappointing earnings report. Armonk, New York-based IBM has now reported 14 consecutive quarters of declining revenue, a tend that shows no signs of improving, according to analysts. IBM annoyed investors further by slashing its earnings outlook for the fourth time in five quarters.
Under CEO Ginni Rometty, the tech bellwether has focused on building its higher-growth businesses such as cloud computing, security, mobile and data analytics -- what the tech giant calls its "strategic imperatives." Though revenue from these efforts rose 27 percent excluding one-time items, it wasn't enough to offset the drop in IBM's legacy businesses.
That drop "is dwarfing the company's ability to capture new revenue opportunities as the market shifts," Bernstein analyst A.M. (Toni) Sacconaghi, wrote in a note to clients. "We believe these structural headwinds are likely to continue to pressure revenues for the foreseeable future."
Sacconaghi, who rates IBM as "market-perform," noted that 2015 "turned out to be much more challenging than the company envisioned. ... We worry that (fiscal year 2016) could be an equally tough or tougher year than (fiscal year 2015)."
Here's a closer look at six of Rometty's biggest hurdles in getting Big Blue heading in the right direction:
Services -- IBM is the largest provider of computer services, while also offering industry-specific consulting. For years, services were a cash cow for IBM. That's no longer true in a now-mature market. In the latest quarter, Global Technology Services revenue fell 10 percent (1 percent adjusted for foreign currency) to $7.9 billion. Global Businesses Services sales fell 13 percent (5 percent adjusted for currency) to $4.2 billion. Signings in the quarter were $9.3 billion, their lowest level since 2003.
Hardware -- Like Dell and Hewlett-Packard (HPQ), IBM faces the huge problem of differentiating its hardware from that of its rivals. Customers increasingly don't see a big difference among brands, a phenomena called commoditization. Hardware was IBM's only business to lose money in the quarter.
Software -- If companies are buying less IBM hardware, they also don't need the programs that go with them. "The result is that less of IBM's traditional offerings are being purchased by its customers, and third-party service providers are less likely to buy from IBM, instead often buying or building their own inexpensive commodity or open-source compute capabilities," Sacconaghi said.
Cloud computing -- Using outside computer networks to run complex software programs is one of the hottest trends in technology. IBM is a big player in this market, earning $9.4 billion in revenue over the past 12 months. Unfortunately, as Morningstar analyst Peter Wahlstrom noted, Big Blue was late to the market and faces stiff competition from rivals such as Amazon (AMZN), Google and Microsoft.
Watson -- IBM's genius supercomputer may be the company's best-known brand ambassador, thanks to its appearance on "Jeopardy" and a commercial featuring Bob Dylan. Rometty recently launched a 2,000-employee Cognitive Business Solutions unit to monetize the technology associated with Watson. That may be easier said than done because businesses are reluctant to spend the hundreds of thousands of dollars on hardware needed to work with Watson, according to Wahlstrom.
Law of large numbers -- IBM'S market value is about $138 billion, and according to a Wall Street adage, the bigger a company, the harder it is to improve its earnings.
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