On Oct. 20, IBM (NYSE: IBM ) handed in a dud of an earnings report. The company badly missed analyst estimates on both the top and bottom lines, and the stock crashed 8% immediately after the quarterly numbers were released.
If there's a silver lining, it's that IBM is continuing the painful yet necessary step of divesting its hardware business. Although that is weighing on IBM today, these moves will pave the way for a brighter future. Here's what investors searching for value in IBM shares need to know now.
IBM's horrible quarter
IBM posted an operating profit of $3.68 per share on revenue of $22.4 billion in the most recent quarter. This came in well short of expectations for $23.37 billion in revenue and $4.31 per share of operating earnings. Management attributed the weak results to poor client orders in September.
At the same time, IBM continued to see progress in its core strategic initiatives. In short, the scourge of underperforming hardware businesses continued. IBM announced it would shed its semiconductor business to chipmaker GlobalFoundries. What's amazing about this deal is that IBM is actually paying GlobalFoundries $1.5 billion to take the money-losing semiconductor business off its hands.This says a lot about where IBM is in hardware. That being said, this is what IBM must do as it moves forward with its years-old turnaround efforts.
IBM has conducted a number of deals in recent years to divest itself of technology hardware. Investors might recall that earlier this year the company sold its x86 server business to Lenovo (NASDAQOTH: LNVGY ) for $2.1 billion.
These deals will help the company focus on other areas outside hardware, such as data analytics and services, which have actually been working in IBM's favor. This is especially true for IBM's cloud-based offerings, where revenue was up more than 50% through the first three fiscal quarters. For cloud delivered as a service, revenue soared 80% to reach a $3.1 billion annual run rate. Other pockets of strength included business analytics, in which revenue increased 8% through the first three quarters, year over year.
However, IBM made a significant change in its financial outlook that severely damages the company's visibility regarding future earnings, and makes investing in IBM based on valuation a very uncertain proposition.
IBM ditches its $20 EPS plan
Along with its earnings report, IBM revealed it could no longer keep its long-given promise to earn $20 per share in operating profit in 2015. This had been a linchpin of IBM's value proposition for investors during its poor performance over the past year.
That pledge had given value investors reason to buy the stock, based on IBM's conservative valuation. At $170 per share, IBM is valued at just 8.5 times forward earnings. This is about half the forward-looking valuation of the broader stock market, which makes IBM look very cheap.
Unfortunately, abandoning that forecast calls IBM's valuation prospects into question. This helps explain why the stock continued to sell off the day after earnings, even while the Dow Jones Industrial Average soared 200 points. Investors buying in at these levels don't have nearly the same confidence in IBM's turnaround prospects.
IBM will release a fresh 2015 outlook in January. The company said it expects full-year 2014 operating EPS to be down 2% to 4% off the previous year's comparable base of $16.64. While IBM stock still looks cheap, part of the valuation case depends on what earnings are going to look like next year. Investors need to pay close attention in the event IBM's new forecast comes in drastically below $20 in earnings per share.
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Sajjad Hussain/AFP/Getty ImagesBlackBerry executive Sunil Lalvani shows off the new Passport. A new smartphone was launched on the market to much fanfare recently. It promised a host of new features, came in a new size and was powered by the freshest version of its company's operating system. No, we're not talking Apple's (AAPL) bulked-up iPhone 6 line. This device is the Passport, the brainchild of BlackBerry (BBRY), a company seemingly back from the dead. Not So Smart In its heyday, BlackBerry (then known as Research in Motion; last year the company renamed itself for its signature product) was the portable communications hardware to own. The original BlackBerrys were basically glorified pagers, with wide displays and tiny keyboards, which allowed users to access and send email. Though it's a rather commonplace feature on phones these days, back in the late 1990s and early 2000s, easy-to-use portable email was a revolutionary concept. But in mobile communications, innovation moves fast, and companies that remain relatively static can quickly get left behind. Similar to Nokia (NOK) and its antiquated Symbian operating system, Research in Motion relied too heavily on the core appeal of its software. That Was Then, and This is Now Technology moved on; once the iPhone hit the market in 2007, and Android followed, there was little chance of success for manufacturers who weren't playing the latest version of the smartphone game. Email had become just another app among many. Starting early this decade, BlackBerry's results started to slide. Revenue dropped from just under $20 billion in fiscal 2011 to $11 billion only two years later, to nearly $7 billion for 2014. The bottom line plunged into the red to the tune of $646 million in fiscal 2013, and a scary $5.9 billion the following year. Meanwhile, Apple and a determined Samsung (SSNLF) rose to the top of the heap with their feature-heavy phones. According to technology research firm IDC, in the second quarter of this year Samsung stood at the peak with a nearly 25 percent share of the market, with No. 2 Apple taking 12 percent. BlackBerry didn't even crack the list of top five manufacturers. Passing Grade? So expectations weren't particularly high last month when BlackBerry launched the Passport, its first new piece of hardware in almost two years. Reviews have generally been positive and complimentary. According to company CEO John Chen, it sold out on BlackBerry.com within six hours of introduction, and inventory has been depleted several times since then. BlackBerry sold around 200,000 Passports on the first day of the device's launch, certainly not iPhone-level numbers, but respectable nevertheless. Besides, massive volume isn't the goal. Realizing that its offerings can't really compete with snazzy iPhones and Samsung Galaxys, BlackBerry decided to abandon the consumer market altogether and concentrate on the corporate segment. This is a very sensible move, as its offerings were always geared more toward productivity -- answer work emails instantly, on the go! -- than game playing or social media status updating. Spreadsheets and X-Rays One big selling point of the Passport is its sizable square viewscreen, which has more real estate and can display more text per line than many rivals -- all the better for a professional to work on a spreadsheet, for example, or review an X-ray. Outside of the hardware sphere, BlackBerry has other initiatives it hopes will help lift the company back into profitability and prominence. The company has become leaner thanks to an aggressive cost-cutting campaign that's seen it sell off assets such as real estate. It also recently closed the book on a workforce reduction program, slimming headcount by around 60 percent over the past three years. The Numbers In addition, it's made efforts to boost its revenue from services and software. The former, which includes offerings linked to its popular Messenger software, was the top revenue source (at $424 million) in the company's most recently reported quarter. As for software, BlackBerry hopes to double revenue from the segment next year. All things considered, though, the company still has a fair distance to go. In its most recently reported quarter, it posted $916 million in revenue. That's well under the $950 million analysts were expecting. And although its net loss was narrower than market projections (2 cents per share vs. 6), it was still a shortfall. Yet the company has believers on the market. They've bid up the stock over the course of this year, lifting it by nearly 40 percent to over $10 per share. They are, of course, hoping for a comeback story -- a passport to renewed success, if you will. More from Eric Volkman