(Bloomberg) -- IBM managed to increase sales for the first time in almost six years, but that growth wasn’t fueled as much by cloud computing and other new products as some analysts had hoped, causing shares to tumble.
“The bulls were hoping for a beat on that segment -- that’s why the stock is trading down,” said Daniel Ives, chief strategy officer at GBH Insights. Revenue in the newer businesses “missed whisper expectations,” which disappointed the most bullish scenarios, he said.
IBM reported fourth-quarter sales of $11.1 billion in “strategic imperatives” -- those newer products and services in cloud, analytics, security and mobile. While that was up 17 percent from a year earlier, it was just in line with the average estimate and many were hoping for more, Ives said.
Much of the growth fueling IBM’s $22.5 billion of revenue in the fourth quarter is coming from its new mainframe servers. Customers from banks to health-care companies are buying the hardware and accompanying software for their own data centers to run large applications -- from financial transactions to customer billing. That should help keep pumping up revenue over the next couple of quarters, analysts said. But IBM will have to show that strategic imperatives will help it keep growing even when the bump from hardware sales fades.
“We think the transition is still in the early innings,” BMO Capital Markets analyst Keith Bachman said in a note before the results. “Based on our experiences with software companies making a similar transition, we think that mix will continue to be a headwind to both revenues and margins over the next few years.”
Sales in the fourth quarter increased 3.6 percent to $22.5 billion, compared with the average analyst estimate of $22.06 billion. International Business Machines Corp. had forecast the growth in October. IBM said it took a one-time charge of $5.5 billion as a result of the new U.S. tax law, which weighed on profit.
Earnings, excluding some items, were $5.18 a share in the period ended Dec. 31, compared with the average analyst estimate of $5.17. IBM came one cent short of the average analyst expectation of $13.81 a share for the full year. Under generally accepted accounting principles, IBM reported a loss for the quarter. The shares fell as much as 4.8 percent to $161 in extended trading.
Over the last six years, Chief Executive Officer Ginni Rometty assured investors that she would refocus IBM’s business on emerging technologies -- such as cloud and artificial intelligence -- and stem the declines. She shed units, invested in cloud data centers and bought a number of companies to boost sales, bolster technology offerings and add troves of data to help train AI algorithms. But those investments have yet to pay off, and analysts have said that IBM’s turnaround is still in the works.
The shares took a beating last year, after the company missed sales estimates in the first half. The stock then rallied the most since 2009 after the company forecast revenue would increase in the fourth quarter. Analysts have said that shows investors care most about getting back to sales growth. One quarter of expansion doesn’t a successful turnaround make, and it’s now critical for IBM to sustain improving revenue this year.
Rometty had set a goal for IBM to reach $40 billion in strategic imperative revenue this year, which would mean those newer products would make up more than half of the company’s business. The company projected revenue growth in 2018.