The Dow Jones Industrial Average was all set to start the week with gains until blue-chip component International Business Machines (IBM) coughed up an ugly loogie of an IBM earnings report.
With that, Dow futures reversed from up to down and the outlook for tech earnings, and more, took a darker turn.
With sprawling global operations in everything from software to systems to consulting is a bellwether of corporate spending, and what IBM said Monday points to troubling weakness ahead. IBM earnings fell 10% year-over-year as revenue fell for a 10th consecutive quarter. Adding to the pain, Big Blue pulled its forecast for next year.
In another worrisome sign, IBM had to pay $1.5 billion to get another company to take its semiconductor operations off its hands. That follows warnings from chipmaker Microchip Technology (MCHP) that the semiconductor industry has hit one of its periodic plateaus.
Tech is one of the most economically sensitive sectors, so weakness from bellwethers like IBM and MCHP is a great way to spook the market — even if some of IBM’s problems sound more company-specific. Here’s IBM CEO Ginny Rometty in a press release:
“We are disappointed in our performance. 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.”
Heck, the results were so bad, IBM dumped them early. The company was originally scheduled to report after the market closed. But whatever credit IBM is due for being forthcoming, it doesn’t take the stink off results.
IBM Earnings Beyond Bad
For the most recent quarter, IBM said net income from continuing operations fell to $3.46 billion, or $3.46 a share, from $4.14 billion, or $3.77 a share in the same quarter last year.
But it gets worse: On an adjusted basis, which is what analysts look at, IBM earnings came t o $3.68 a year. That’s a huge miss when Wall Street is looking for adjusted earnings of $4.31, according to a survey by Thomson Reuters.
Revenue fell to $22.4 billion from $23.3 billion a year earlier, hurt by lower-than-expected software revenue, insufficient productivity in services and currency fluctuations.
Weak client spending in the last quarter likely extends beyond IBM — a stark reminder that even as the U.S. economy is slowly and incrementally picking up, the rest of the world isn’t. True, IBM is struggling with revenue declines in legacy business as it tries to grow its cloud services, Big Data and mobile security businesses, but the world’s largest tech services company doesn’t report results this ugly without macroeconomic help.
That alone will weigh on the tech sector beyond Monday’s pummeling. IBM fell more than 8% at one point after the opening bell — a huge move for a stock with a market cap of $170 billion. Indeed, at its early nadir, IBM cost Warren Buffett, its largest shareholder, more than a billion dollars.
By price-to-earnings measures, IBM looks like a bargain, but that doesn’t make it a buy. Sometimes stocks are cheap for a reason, and IBM looks to remain depressed until it makes tremendous progress in reversing its slumping top line.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
