IBM Shares Take Currency, China Hit

NEW YORK (TheStreet) -- IBM (IBM) shares were sinking 5.8% to $175.95 in after-hours trading Wednesday after the technology giant reported a beat on third-quarter earnings expectations but a miss on the top line following a negative currency hit and as key growth markets trailed the majors for the first time.

"Clearly we need to improve performance predominantly in the key growth markets," IBM CFO Mark Loughridge said during IBM's earnings call. "But we are confident this can get back on track by 2014," with mid-single digit growth in the growth markets by mid-2014.

Solid growth in North America and a return to growth in Europe was offset by tepid revenue performance in key emerging growth markets. The company's growth markets in the third-quarter were down 9%, as sales in Brazil, Russia, India and China fell 15% driven by a sharp slowdown in hardware sales in China, which makes up about 40% of its business in the country. Loughridge explained demand from state owned enterprises in the country weakened as procurement cycles lengthened, driven by a pause related to adjustments tied to the development of key economic plans being brought about under the new leadership in China. He expects that IBM will be affected by these plans for the next couple of quarters and that a pick-up in China hardware performance won't be seen until the first quarter of next year.

IBM CEO Ginni Rometty said the company is taking action to improve execution in its growth markets unit and in the elements of its hardware businesses that are underperforming. Given these actions, she said she remains confident in IBM's ability to achieve at least $20 in operating EPS in 2015.

The company reiterated its 2013 adjusted earnings guidance at least $16.25; and at least $16.90, excluding the second-quarter workforce rebalancing charge of $1.0 billion. It's also expecting a strong fourth-quarter pipeline in software, which the company estimates could lead to double-digit profit growth.

IBM reported that its third-quarter net income rose 6% to $4.4 billion, or $3.99 a share on an adjusted basis. Revenue fell 4% to $23.7 billion, and was down 2% after adjusting for the negative currency impact of $600 million dollars that was also attributable the deprecation of the yen. Analysts, on average, were expecting earnings per share of $3.96 on revenue of $24.7 billion.

For the first time on Wednesday provided a breakdown of its cloud revenue, reporting that it increased more than 70% year to date with revenue in third-quarter exceeding $1 billion factoring in the impact of its July, SoftLayer acquisition. Of the total cloud revenue generated in the quarter, about $460 million was attributable to its public cloud services. The balance of the company's total cloud revenue for the quarter was derived from IBM's hardware, software and services sold to clients for their build-out of private clouds.

The company cautioned ongoing currency translation pains through the first-quarter of the next year based on current spot rates.

-- Written by Andrea Tse in New York

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