IBM (IBM) used its fourth quarter earnings report to crow that its most cutting-edge businesses -- the buzzword-worthy cloud, mobile, security and big data analytics units -- had grown to 35% of total revenue.
But that $29 billion, up an impressive 17% from last year, would only total 30% of total revenue if the rest of IBM's world was holding steady. Instead, the rest of IBM is shrinking at a rapid rate, from $68 billion in 2014 to less than $53 billion last year -- a 25% decline outpacing the gain in the "strategic imperatives."
CFO Martin Schroeter highlighted that the imperatives grew 26% excluding the impact of weaker foreign currencies and the divestiture of IBM's low-end server unit. "We are more and more encouraged that the strategy is right," he said on a call with analysts after the results were released.
The fourth quarter overall about met expectations for overall shrinkage of "Big Blue" as it transitions to "Medium Blue." Adjusted earnings per share of $4.84 were 3 cents ahead of Wall Street analysts' average, according to Factset, thanks in part to a lower than expected tax rate. And total revenue of $22.1 billion matched the average estimate on Factset.
But the real bucket of cold water for investors came as CFO Schroeter disclosed that 2016 wouldn't be much better.
Thanks to further expected shrinkage in the old line businesses and that old IBM bugaboo, the strong dollar, adjusted earnings for next year are expected to total only $13.50, a 10% drop, the same as last year. Schroeter blamed about $1 per share of the expected shortfall on the dollar, meaning that even in a pretend global economy where currency doesn't count, IBM's adjusted earnings per share would still be down for the third consecutive year.
Upon hearing the latest forecast, IBM shares dropped more than 4% in afterhours trading on Tuesday, before the global turmoil in markets exacerbated the decline on Wednesday. In early trading on Wednesday, the shares were down 6% to $120.65, a new low going back to 2010 and erasing nearly six years of gains.
Some analysts fretted that IBM might not even reach its lowered forecast. "While IBM materially lowered the bar on EPS, the company’s tone on its conference call was surprisingly (perhaps worrisomely) upbeat," Berstein Research analyst Toni Sacconaghi wrote afterwards. "Moreover, we worry that the bar is simply not low enough."
The problem may be that while IBM was a leader in the old IT world where big companies owned most of their own computers, ran thier own data centers and bought software licenses for all their employees, the company is not at the top of the pack in the new world. CEO Ginni Rometty has likely correctly identified the new world's emphasis on cloud services, mobile devices and apps, better security and data analytics, but IBM isn't a leader in most of those fields.
Rometty, who took over at the start of 2012, has gotten mostly praise for her efforts to turn around the lumbering giant. But with 15 consecutive quarters of revenue decline -- and analysts expecting the trend to continue at least through the next six quarters -- questions may start to mount.