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IBM earnings and revenue continue to shrink ahead of major shakeup, stock falls 6%

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While 2020 was an odd year, one thing remained the same: IBM earnings continued to shrink.

International Business Machines Corp.
IBM,
+1.21%
on Thursday afternoon reported a decline in adjusted profits for at least the seventh consecutive year, and a stepdown in sales for the eighth year out of the past nine, according to FactSet records. Analysts expected Big Blue to maintain or improve both earnings and revenue at the beginning of 2020, the first full year with large software acquisition Red Hat, but the COVID-19 pandemic led adjusted profits to decline by nearly a third in 2020.

For the fourth quarter, IBM reported net income of $1.36 billion, or $1.51 a share, down from $4.11 a share last year. After adjusting for a large restructuring charge and other effects, IBM reported earnings of $2.07 a share, down from $4.79 a share in the fourth quarter of 2019.

Sales declined to $20.37 billion from $21.78 billion the year before, coming off IBM’s lowest quarterly revenue since 1997; IBM revenue has fallen year-over-year in all but four of the past 34 quarters. Analysts had expected adjusted earnings of $1.81 a share for the quarter on sales of $20.7 billion.

For the year, IBM adjusted earnings fell to $8.67 a share from $12.81 a share in 2019, and revenue dropped to $73.62 billion from $77.15 billion. At the beginning of 2020, analysts expected IBM to produce adjusted earnings of $13.30 a share on sales of $79.4 billion, according to FactSet, but expectations took a sharp dive after the pandemic hit.

In 2021, Big Blue will be getting smaller intentionally, with the planned spin-off of its managed-infrastructure business. Along with the Red Hat merger and the installation of new Chief Executive Arvind Krishna, the spin-off is part of an effort to better position IBM as a powerhouse in hybrid-cloud infrastructure.

Krishna said Thursday that IBM expects to grow revenue in 2021, but the forecast was rather vague, mentioning only revenue and free cash flow.

“The actions we are taking to focus on hybrid cloud and AI will take hold, giving us confidence we can achieve revenue growth in 2021,” Krishna said in Thursday’s announcement.

Analysts weren’t expecting much better from the company, but do expect growth from the coronavirus-afflicted 2020 results. On average, they were projecting adjusted earnings of $11.36 a share and revenue of $74.76 billion.

“Q4 will be a messy (and tough revenue) quarter, 2021 is a transition year with poor revenue growth and FCF, and investors are likely to sit on their hands until more details on the spin-out,” Bernstein Research analyst Toni Sacconaghi wrote ahead of the report, adding that he considered IBM’s earlier projections for revenue growth in 2022 to be “unrealistic.”

IBM stock fell 6% in after-hours trading following the release of the results. Shares have declined 5.1% in the past year, as the Dow Jones Industrial Average
DJIA,
-0.04%
— which counts Big Blue as a component — has gained 6.8% and the S&P 500
SPX,
+0.03%
has gained 16%.

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