IBM growth signs fail to convince investors

NEW YORK • IBM came the closest in more than four years to reporting quarterly revenue growth on Monday, a sign that Big Blue may finally be about to turn its business around.

Yet investors reacted negatively, with the shares dropping as much as 3.7 per cent. While operating gross profit margins narrowed for the fourth consecutive quarter, the firm reported earnings per share that were better than projected, buoyed by larger-than-expected income from intellectual property.

Meanwhile, acquisitions helped revenue in the quarter by 2 percentage points, highlighting how much of IBM's growth is boosted by inorganic sources. Some analysts have expressed concern that growth - especially in software - may be stagnating and masked by a quicker acquisition pace in the last few years.

Since chief executive officer Ginni Rometty took the top post in 2012, investors and analysts have been waiting for what some call the "inflection point", where the growth in and size of newer businesses exceed the declines in the older ones. Returning to revenue growth would be an indicator that IBM has reached this point, and the Armonk, New York-based company reported only a 0.3 per cent decline in sales in the third quarter.

That is why Mr Dan Morgan, senior portfolio manager at Synovus Securities, was surprised by the negative stock reaction. "They even showed positive growth in the different segments, which I wasn't looking for in this quarter."

Plus, said Bloomberg Intelligence analyst Anurag Rana, declining earnings are not necessarily a bad thing while IBM moves its business. "There will be pricing pressure on some of these services and, at the end of the day, if this is leading to potential for these guys to grow in a couple years, that's not a bad deal."

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A version of this article appeared in the print edition of The Straits Times on October 19, 2016, with the headline 'IBM growth signs fail to convince investors'. Print Edition | Subscribe