IBM’s China troubles could be getting worse - Business isn’t looking brighter, and now Lenovo deal is stalled
1 July 2014
, by Therese Poletti - San Francisco (MarketWatch) http://www.marketwatch.com/story/ibms-china-troubles-could-be-getting-worse-2014-07-01IBM Corp.’s revenue has declined for eight consecutive quarters, but it steadfastly continues to maintain a strong earnings outlook for both 2014 and 2015, even as analysts have become more skeptical that the company will deliver.
Investors are hoping for an update on IBM”s goal of reaching $18 in earnings per share for 2014, and to learn of any encouraging signs for its hardware business.
The tech giant is slated to report second-quarter earnings on July 17.
But many on Wall Street appear dubious that IBM will be able to hit its targets.
The current Wall Street consensus for earnings in 2014, according to FactSet Research, is $17.88 a share, with revenue of $97.38 billion, down from $99.75 billion in 2013.
The average recommendation on the stock is a hold.
Adding new pressure to IBM are recent reports from China that suggest its current troubles there may not improve.
In the third quarter of 2013, a big drop in sales in China especially hurt IBM’s results.
The company cited business execution problems and China’s economic reforms as contributors to the decline.
Then in April, IBM said first quarter revenue in China fell 20%.
“We’re seeing a slowdown in that procurement process as they implement reforms,” IBM Chief Financial Officer Martin Schroeter told a J.P. Morgan Technology Conference in May.
“We are investing with the idea that China, like the rest of the growth markets, they’re absolutely going to come back and they’re going to be fine.”
But, he added, “you can’t predict when that is going to happen.”
IBM is also doing more to work with customers in China.
In early June it opened a new customer center in Beijing especially designed for mainframe and cloud computing, where customers can go for briefings, technical training, testing and technical support.
But news agency Caixin Online in Beijing reported last week that some Chinese companies are starting to pull the plug on expensive mainframe hardware and software made by IBM, Oracle and EMC, in favor of cheaper Chinese developed technology.
Huawei Technology, for example, was described as one rival that has been winning contracts from state company and bank information technology departments.
In addition, some Chinese Internet companies, like Alibaba, are copying Facebook and Google and developing their own data centers and server racks with off-the-shelf hardware.
In the first quarter of this year, IBM saw revenue of its overall hardware business fall 23%, with mainframes hit the hardest.
Yet IBM has managed to report strong earnings, helped in part by cost management and stock buybacks.
Schroeter will host his second call with Wall Street later in July. There will likely be more questions about China.
Compounding IBM’s issues in China now is the company’s pending $2.3 billion sale of its server business to Lenovo, which the Wall Street Journal reported last week has stalled, as the U.S. government investigates security concerns over the deal.
The same issues came up previously in 2005 when Lenovo bought IBM’s PC business, which eventually was given the go-ahead, with some conditions.
Investors also will be listening closely for updates from IBM on its sales to China, or whether media reports about IBM’s China business are overblown.
Indeed, as Caixin Online itself noted, the switch to servers developed by Chinese companies is a slow process, especially for banks, because some suppliers have yet to meet the necessary security and stability requirements.
Cindy Shaw, an analyst at Discern, wrote in a note on Monday that she expects market share losses to erode sales in China for enterprise IT vendors including IBM, EMC and Oracle (the latter two of which she does not cover) and to a lesser extent Hewlett-Packard.
“Efforts to replace the existing infrastructure should have a very long tail that causes a slow decline in current recurring revenue (e.g., services and software licenses),” she wrote.