IBM Admits It Is Time to Turn Over a New Technological Leaf

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The chief executive officer of International Business Machines (NYSE:IBM), Ginni Rometty, has acknowledged that the technology manufacturer fell short of expectations last year, making it necessary for the company to address its struggling hardware businesses. “We must acknowledge that while 2013 was an important year of transformation, our performance did not meet our expectations,” Rometty wrote in a letter to investors included in the company’s annual report. “While we continue to remix to higher value, we must also address those parts of the business that are holding us back.”

What the company must figure out is how to profit from selling selling technical services to support the burgeoning corporate use of smartphones and tablets.

IBM’s revenue decreased 5 percent last year. Ahead of the technology giant’s release of fourth-quarter and full-year results, analysts were already questioning the quality of IBM’s earnings. After peeling back the layers of the company’s earnings report, it was clear that even though IBM management is able to almost systematically beat Wall Street expectations, the company is no longer the reliable earnings machine it once was. In the seven consecutive quarters through the fourth quarter of 2013, IBM’s revenue has fallen, largely due to weakening demand for its hardware products. “The poor near-term results and question raised about farther out earnings power can’t be ignored,” wrote UBS analyst Steve Milunovich in an October research note to clients.

In the fourth quarter, IBM did manage to beat bottom-line expectations, but the technology company was able to exceed Wall Street forecasts and grow earnings largely because of its efforts to cut costs, which included job reductions, the sale of low-margin businesses, and lower income-tax provisions. Cutting costs, favorable tax brackets, and share buybacks are strategies to boost earnings, but strategies do not make for quality earnings growth. In particular, IBM’s methodical buybacks of its own stock are problematic, even if they do boost earnings per share.

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