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Once a success story, IBM now disappoints

Shares of IBM are sinking after the technology giant reported disappointing financial results and scrapped a long-held earnings promise to shareholders.

The stock, which has dropped 9 percent this year, fell more than $14 in morning trade and is near a three-year low. Big Blue's shares have underperformed those of rivals such as Hewlett-Packard, which has recently announced plans to split itself in two, Apple (AAPL) and Microsoft (MSFT), both of whose stocks have posted double-digit gains this year.

For IBM and CEO Virginia Rometty, this was a quarter to forget. The company reported net income of $18 million, or 2 cents per share, down sharply from roughly $4 billion, or $3.68 per share, in the year-ago period. The latest results include a loss from discontinued operations of $3.4 billion. On a continuing operations basis, profit was $3.68 per share versus $4.08 a year ago. IBM's sales have fallen 10 straight quarters.

"We are disappointed in our performance," Rometty 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."

Rometty, who in 2012 became the first woman to head IBM after succeeding Sam Palmisano, was counting on a rebound in business in the second half of the year, but it failed to materialize. That forced her to abandon Palimisano's 2010 pledge to double the company's earnings to at least $20 per share in 2015, which Wall Street analysts had increasingly suggested was unrealistic.

Noted investor Warren Buffett is IBM's largest shareholder and reportedly sustained a loss of more than $1 billion because of today's drop in the company's stock price.

Business lines at IBM that had been reliable sources of growth in past years, such as the company's consulting services, failed to deliver in the quarter. Revenue at the business, IBM's largest, dropped 3 percent to $13.7 billion. When the effects of foreign currency are excluded, sales were flat. IBM's services backlog, a key metric of the company's overall health, was $128 billion as of September 30, down 7 percent on a year-over-year basis. Pre-tax income for Global Business Services and Global Technology Services, the main areas of Services, both slumped by double digits

Software was another weak spot, with revenue tumbling 2 percent to $5.7 billion amid lackluster demand for key IBM products. The company's hardware business reported a loss of $99 million as sales of mainframe computers and storage devices fell.

In an interview with CNBC, Rometty explained that the company was too slow to react to technology changes, such as the growth of cloud computing, and would react more quickly in the future. She hinted about possible layoffs though she declined to provide details.

In a move cut costs, IBM also unveiled plans to dispose of its computer chip business, which has long been a drag on the company's earnings, by paying GlobalFoundries $1.5 billion to take over the business.

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