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[video] IBM Is Boxed In by Falling Hardware Sales

WATCH: Jim Cramer on IBM Earnings

NEW YORK (TheStreet) -- IBM (IBM - Get Report) sales continued to fall in the fourth quarter, with hardware leading the way down.

Revenues of $27.7 billion were below analysts' estimates of $28.25 billion, and the company's total sales for the year came in at $99.8 billion, against $104.5 billion in 2012. The total sales for the year barely matched 2010's total of $99.87 billion.

The immediate response was for CEO Virginia Rometty and her top team to forego their annual bonuses. But the problem is much bigger than that.

As I wrote last month, IBM faces a true existential crisis. It's similar to what it faced in the early 1990s when it lost command of PC standards to Microsoft (MSFT). But it's actually worse, because this time there's nothing to fall back on.

The obvious response is to move toward cloud computing, and the $1.2 billion investment announced last week will help.

But no matter how fast it bails out sales with cloud, the leak of sales from hardware seems bigger. IBM's move to sell its server business to Lenovo (OTC:LNVGY) might be a smart move, but it would have been a smarter move six months ago, when the two companies reportedly stalled on price. Today's price may be lower than the previous offer.

In the cloud, meanwhile, IBM is being squeezed both by Amazon's (AMZN) willingness to invest every dollar of revenue back into the main business, and by Google's (GOOG) continuing capital build-out which amounted to $2.29 billion in the third quarter of 2013 alone.

IBM remains committed to bottom line growth, as its earnings release makes clear. Despite falling revenue, IBM grew net income by 6%, to $6.2 billion, and fully diluted earnings by 12%, to $5.73 per share. The release said the company is "on track" for 2015 earnings of $20 per share.

Those goals, in light of falling sales, can't make for great morale among IBM employees. The only way to raise profits and increase capital expenditure while sales fall is to cut expenses. That means reducing the head count.

There are no smug, easy answers here, which is one reason I sold my own holdings in IBM and told readers about it. The company has been making the obvious moves, selling the server business and buying SoftLayer for its cloud business, then investing heavily in it.

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