Does IBM have a legacy hardware problem?

Does IBM have a legacy hardware problem?

Analysts suggest IBM's legacy hardware business continues to hurt margins growth

IBM’s full-year profit forecast has fallen short of Wall Street’s latest targets, sending the technology company's shares down as much as six per cent.

IBM said it continues to expect adjusted earnings per share of at least US$13.80, while analysts were expecting US$13.83.

"We delivered exactly what we said 90 days ago. The US$13.80 is an 'at least' and it's up one to two percent year over year," IBM's CFO James Kavanaugh said in an interview.

However, analysts were not impressed by the quality of the earnings. "This is exactly what happened last quarter. But again the quality of earnings was not that great," Wedbush Securities analyst Moshe Katri said.

"It's not necessarily about topline growth, it’s about profitable growth."

Katri said IBM's legacy hardware business continues to hurt margins growth, and its business, which the company calls strategic imperatives and includes the contribution of cloud computing, has slowed.

IBM has in recent years shifted focus to high-margin businesses — such as cloud, cybersecurity and data analytics — to counter a slowdown in its legacy businesses.

IBM's revenue grew five per cent to US$19.07 billion in the quarter with 65 per cent growth in sales from security services. Cloud revenue grew 25 per cent.

However, net profit fell to US$1.68 billion, or US$1.81 per share, in the first quarter ended March 31 from US$1.75 billion, or US$1.85 per share, a year earlier.

Excluding items, the company earned US$2.45 per share, beating the analyst average estimate of US$2.42, according to Thomson Reuters I/B/E/S.

"We feel very comfortable as we enter the second quarter and the remainder of the year that we can actually deliver moving forward," Kavanaugh said.

IBM shares, which has risen about five per cent this year, were down 5.6 per cent at US$151.85 in extended trading.

(Reporting by Pushkala Aripaka and Munsif Vengattil in Bengaluru; Editing by Arun Koyyur)

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