IBM dumps its chips division, reports weak earnings

October 20, 2014, 12:27 PM UTC
Photograph by Odd Andersen — AFP/Getty Images

International Business Machines said Monday (IBM) its third-quarter net income tumbled more than 99% from a year ago, as the tech company booked a $4.7 billion pre-tax charge related to the sale of the company’s chip division to Globalfoundries.

What you need to know: CEO Virginia “Ginni” Rometty’s IBM has issued a dismal report on multiple fronts. IBM is paying Globalfoundries about $1.5 billion in cash over the next three years to take the chip division off of its hands. The charge that IBM reported on Monday includes estimated costs related to the transaction, as well as that cash portion that is being paid to Globalfoundries. Rometty said the move was needed to take a “significant” action to exit a nonstrategic element of IBM’s business, and intends for the company to move forward by focusing on research and development in other areas.

IBM abandoned its earnings forecast for 2015. FBR Capital Markets analyst Daniel Ives said IBM “needs to find success and growth in the cloud through organic and acquisitive means in our opinion, otherwise there could be some darker days ahead for the tech giant [and its investors].”

The big number: IBM’s quarterly profit for the latest period totaled just $18 million due to the charge. But earnings per-share on an adjusted basis were $3.68 — far short of the $4.32 projected by analysts surveyed by Bloomberg. Total revenue slipped 4% to $22.4 billion, also falling short of the $23.37 billion analysts had hoped for, as demand slipped across all geographic regions.

The revenue decline was mostly due to a sharp 15% drop for the systems and technology business, although revenue also fell for technology and business services, as well as software. Gross margins for all of IBM’s businesses, with the expect ion of global financing (a tiny division), were lower than a year ago.

What you might have missed: The pressure is on Rometty (who for the third year in a row topped Fortune‘s list of Most Powerful Women). In a prepared statement, she said IBM was “disappointed in our performance.” IBM saw a “marked slowdown in September in client buying behavior,” she added, and said IBM didn’t produce results it hoped to achieve — though she struck a hopeful tone about the strategic growth areas of cloud, data and analytics and mobile.

“We will continue to make the investments and the changes necessary to manage our business for the long term,” Rometty said.

—Reuters contributed to this report.