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IBM earnings reveal two major challenges that won't be easily fixed

Brian Sozzi
·Editor-at-Large
·4 min read
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IBM (IBM) is already trying to get investors excited about 2022 despite only being 22 days into 2021.

And that’s not exactly great news to investors in the here and now, many who have bought early into the turnaround story pitched by new IBM CEO Arvind Krishna.

Shares of Big Blue tanked more than 8% in early Friday trading following a lackluster fourth quarter on most fronts. Despite company executives trying to suggest better times are ahead in 2022 (the year was mentioned by executives 10 times on the earnings call), Mr. Market fixed its gaze on the fourth quarter performance. And there wasn’t much to like.

Total sales declined for the fourth straight quarter amid pressure on getting large software deals done during the pandemic. The sales drop accelerated compared to third quarter. Sales dropped in all five of IBM’s reportable business segments, paced by a 17.8% decline in its system business. The lone bright spot continued to be hybrid cloud player Red Hat, where sales gained 17%.

Here’s how IBM performed versus Wall Street estimates.

  • Net Sales: down 6.5% to $20.4 billion versus estimates for $20.75 billion

  • Diluted EPS: $2.07 versus $1.79 estimates.

To be sure, there is more to the market’s smackdown on IBM’s stock than investors reacting to a simple revenue shortfall. Yahoo Finance found two red flags on the IBM earnings call that suggest 2021 will be a challenging year for the tech giant.

First, it may take time for Krishna to jump start IBM’s culture into a growth mindset instead of one just happy with the status quo.

“Let me say a few words about the changes we’re bringing to our culture. Since I became CEO I’ve talked at great length about the importance of culture and the need to instill a growth and entrepreneurial mindset. As part of that, we are encouraging more business risk taking and ensuring a higher tolerance for failure across the business. This should allow us to more quickly respond to clients, seize more opportunities and drive better business outcomes,” Krishna explained on the call.

The mention could be viewed by the market as one akin to a general calling out of troops to quickly shape up or ship out.

NEW YORK, NY - JUNE 16:  SVP and Director at IBM Research Arvind Krishna speaks on stage during the 2016 Wired Business Conference on June 16, 2016 in New York City.  (Photo by Brian Ach/Getty Images for Wired)
IBM CEO Arvind Krishna Arvind Krishna speaks on stage during the 2016 Wired Business Conference on June 16, 2016 in New York City. (Photo by Brian Ach/Getty Images for Wired)

Meanwhile, IBM appears to be battling several issues in getting its revenue sustainably back on track.

Explained Krishna, “Our performance reflects the fact that our clients continue to deal with the effects of the pandemic and broader uncertainty of the macro environment. This put additional pressure on larger software transactions this quarter, and project delays in some services engagements. Our revenue growth was also impacted by IBM-specific headwinds of our product cycle and compare challenges.”

“A weaker than expected print for IBM’s software business raises new concerns,” wrote Morgan Stanley analyst Katy Huberty in a client note.

IBM promised better revenue results in coming quarters.

Not helping the medium-term fundamentals of the business is the company’s work to spin off its managed infrastructure services business inside its global technology services business. Announced in early October, that is expected to create a new public company currently dubbed “NewCo” by the end of 2021. By spinning off the business, Krishna aims to hyper focus IBM on hybrid cloud, following its 2019 acquisition of Red Hat.

IBM’s stock had rallied about 23% from its October 2020 low in large part because of that news.

But clearly investors will need to be more patient with an IBM in full on turnaround mode. Maybe 2022 will be its year after all.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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