After more than five years of declining sales, IBM says it will finally show investors it can grow again. Some of that boost will come from one of the company’s legacy hardware businesses, rather than the new services such as cloud and data analytics on which IBM has been pinning its prospects for growth. Fourth-quarter revenue is projected to be £22 billion to £22.1 billion, which will represent as much as a 1.5 percent bump from the same period in 2016.
It also tops analysts’ average estimate of £21.8 billion. In the last quarter of the year — historically IBM’s strongest — revenue will improve by as much as £2.9 billion sequentially, boosted in part by sales of its new mainframe server, Chief Financial Officer Martin Schroeter said Tuesday on a call to discuss earnings. “The mainframe is going to drive a lot of the positive growth in the fourth quarter,” said Josh Olson, an analyst at Edward Jones & Co. “When you’re selling mainframes, you’re also selling a lot of software and services with that.” He rates the stock a hold.
If IBM achieves its outlook, it will end a 22-quarter streak of shrinking sales. During the third quarter, International Business Machines Corp. came the closest to stemming that decline since the same period in 2016. Getting back to growth on the top line has been a major goal for Chief Executive Officer Ginny Rometty and a milestone investors are looking for as proof that the company can finally climb out of its rut.
But the mainframe business is cyclical, and analysts aren’t convinced that IBM can sustain growth after server sales start tapering off. To prove it has reached the inflection point, IBM will need to show that its other categories — in particular its newer businesses including cloud software and services — can pick up the slack, Olson said. Analysts see positive signs in some of those areas, but are looking for continued growth before saying IBM’s turnaround is successful.
“They definitely have some potential going into 2018 in certain parts of the business, and you couldn’t say that a few years ago,” said Daniel Ives, head of technology research at GBH Insights. “It’s an execution story and 2018 will be a huge proving year for Rometty and IBM.” Total revenue in the third quarter was £19.15 billion, a decrease of less than 1 percent from a year earlier, but higher than the analyst average estimate of £18.6 billion. Growth came from hardware, as well as the group that houses much of its software products.
Cognitive solutions, a segment that includes Watson analytics and other newer products for IBM, grew 3.9 percent, after a decline during the prior period. The systems unit also reported a gain, helped by improved sales in data storage products and the new mainframe server, which became available late in the third quarter, Schroeter said in an interview. The shares rose as much as 5.3 percent in late trading to £154.33.
“Cognitive solutions has attracted a lot of our investment, and when we look at underlying performance, it captures and reflects a lot of the new strategic imperative areas we’re going into,” Schroeter said. These “strategic imperatives” include analytics, security and Watson-branded products and are a key indicator for IBM’s future success. “We saw pretty broad-based growth across all cognitive solutions elements,” he said. Big Blue had a rough first half, missing revenue estimates for the first two quarters.
The stock is down more than 11 percent this year, while the broader technology sector has been soaring to records. IBM’s status as a bellwether stock that paid high dividends had kept many investors hopeful that the company could turn things around, but the multiyear revenue declines have eroded confidence. Warren Buffett, once IBM’s most vocal champion and largest shareholder through his Berkshire Hathaway Inc., soured on the company and sold about a third of Berkshire’s investment in IBM earlier this year.
Under Rometty, Armonk, New York-based IBM has been working to add revenue in cloud-based software and services. These newer operations now make up more than 40 percent of IBM’s total sales. But legacy businesses continue to deteriorate.
Rometty has also invested more in artificial intelligence technology under the Watson brand, peddling the suite of products as IBM’s future and the driver for long-term growth. But the company doesn’t break out sales for Watson services and folds the group under the cognitive solutions segment — implying Watson isn’t yet big enough to be material. Operating profit, excluding some items, was £3.30 a share in the quarter ended Sept.
30, compared with the average analyst estimate of £3.28.
IBM improved its gross margins from the previous quarter, in line with Schroeter’s forecast.
That’s in part because IBM increased its software sales, which is highly profitable, and in part because the company is also growing its cloud business, which has better margins the bigger it gets, he said.
By Larry Parnass
MOUNT WASHINGTON — More than 14 months ago, the Massachusetts Broadband Institute gave this town $230,000, making it only the second “fiber to the home” broadband project to win state backing.
Now, Berkshire County’s smallest community is a month from lighting up its new fiber-optic network and coming off the rolls of “unserved” towns. Fiber-optic cable now laces along utility poles. Special “ONT” boxes are being positioned inside homes to translate pulses of light into electric signals. Gail Garrett, Mount Washington’s town clerk and a member of its Select Board, said 98 connections are planned, a number that keeps climbing as the start date nears. The town has 146 premises that are candidates for broadband connections, including Town Hall and the highway department. “Everybody’s had it with their current connections,” Garrett said. That frustration was expressed earlier when 60 percent of residents opted in, committing themselves to three years of data and telephone service through the network and plunking down $300 deposits. The state followed up on its initial investment with another grant this spring of $222,000, reducing the eventual cost to local taxpayers. Earlier, residents agreed to take $250,000 from a stabilization fund and to borrow $450,000.
Jim Lovejoy, a Select Board member, told The Eagle earlier that the second grant could allow the town to reduce its borrowing costs. “It’s hard to argue with the support that we’ve received from the administration,” he said. Network builder
Mount Washington picked NextGen Telecom Services Group to build its network in January 2016, just after the MBI ended a planned association with the WiredWest cooperative to operate a large regional network. Gov. Charlie Baker then ordered a pause in the MBI’s work, a period that lifted in April 2016 with the rollout of a new approach to “last mile” broadband connections. A little more than a year later, the town is poised to provide customers with download speeds of 500 megabits per second, 20 times the federal definition of broadband connection speeds. The project was slowed by delays in “make ready” work on utility poles. By Oct.
16, all equipment is to be installed in a refurbished space in the back of town hall. The work was taken over by White Mountain Cable Construction, which will maintain the network for one year. After that, Garrett said the town will seek a new company to make repairs.
“We’re hoping to go live Oct.
19 or 20,” Garrett said. Though the service will cost $119.95 a month, plus tax, Garrett said that by eliminating regular phone service, she believes the package is competitive for subscribers. The speeds will exceed those now available in Mount Washington, Garrett said, including satellite internet and a wireless service. Crocker Communications will serve as the network operator and internet service provider, or ISP. Garrett said the company is in the process of transferring Verizon landline phone numbers over to eventual voice-over-internet service. Garrett notes that one side benefit of the network is a lift in real estate transactions.
Houses that hit the market have been selling, she said.
“We’ve had great interest because of broadband,” Garrett said.
Reach staff writer Larry Parnass at 413-496-6214 or @larryparnass.
A surge in Amazon.com Inc. shares Thursday morning in advance of the online retailer’s earnings report has propelled founder Jeff Bezos past Bill Gates as the world’s richest person. Shares of the online retailer rose 1.3 percent to £1,065.92 at 10:10 a.m. in New York, giving Bezos a net worth of £90.9 billion, versus £90.7 billion for Gates. If that holds through the 4 p.m. close, Bezos, 53, will leapfrog Gates, the Microsoft Corp. co-founder, on the Bloomberg Billionaires Index.
Gates, 61, has held the top spot since May 2013. Investors and analysts, in addition to watching Amazon’s progress in taking market share in categories such as apparel and groceries, will be scrutinizing how many new subscriptions the retailer sold for its £99-a-year Amazon Prime service, which offers delivery discounts and video and music streaming. Prime shoppers spend more than customers who don’t have a membership.
“Amazon Prime is why so much physical retail is going away,” said Michael Pachter, a Wedbush Securities Inc. analyst who has a buy rating on the stock and a price target of £1,250. “Anyone who joins Prime shops in retail stores 10 percent less, and that number will keep accelerating as Amazon adds more inventory.” Investors also monitor Amazon’s cloud-computing division, Amazon Web Services, a fast-growing and profitable business that accounts for about 10 percent of revenue. Amazon leads the cloud-computing industry, but faces increasing competition from Microsoft and Google parent Alphabet Inc.
Amazon is expected to post quarterly revenue of £37.2 billion, a 22 percent jump from a year earlier, according to the average estimate of 34 analysts surveyed by Bloomberg, and earnings per share of £1.42. Read also: Amazon antitrust concerns emerge in Washington and Wall Street Meanwhile, Facebook Inc.’s intraday gains have helped pull co-founder Mark Zuckerberg, 33, within £200 million of Berkshire Hathaway Inc.
Chairman Warren Buffett, 86, who’s currently ranked fourth on the Bloomberg index with a net worth of £74.5 billion. Bezos owns about 17 percent of Seattle-based Amazon, which has surged 40 percent this year through Wednesday, helping to add £24.5 billion to his net worth. He started 2017 as the world’s fourth-wealthiest person and has since surpassed Buffett and Inditex SA founder Amancio Ortega, 81, who ranks third with £82.7 billion.