IBM stock falls 7% after it downgrades earnings forecast

International Business Machines Corp. fell seven per cent Monday morning on stock markets after it abandoned a five-year plan to boost its profit.

Big Blue to pay Globalfoundries to take over its semiconductor unit

Ginni Rometty, chairwoman and CEO of IBM, sold off the company's underperforming semiconductor business by paying Globalfoundries to take it. (Manu Fernandez/Associated Press)

International Business Machines Corp. fell seven per cent Monday morning on stock markets after it abandoned a five-year plan to boost its profit.

IBM, which makes up a big share of the Dow industrial index, was down $12.95 to $169.10 US at the close of trading after announcing third-quarter earnings and a deal to get rid of its semiconductor unit.

IBM backed away from a pledge — made by former CEO Sam Palmisano and reiterated by current CEO Ginni Rometty in 2012 — to reach adjusted profit of $20 a share by 2015. She said 2014 operating earnings per share would fall two to four per cent from the $16.64 reported in 2013.

Rometty’s statement to analysts followed a disappointing third quarter in which IBM reported profit of $18 million or two cents a share, well below analysts expectations of $4.30 a share.

The Armonk, New York-based company posted revenue of $22.4 billion, also less than analysts had predicted.

Both weaker-than-expected software sales and lower productivity in services hurt third-quarter revenue.

Struggling with the cloud

The company is struggling as it attempts to transition to cloud-based services, as technology clients have less need for IBM hardware-based servers and services.

Cloud offerings at IBM are expected to bring in $3.1 billion on an annualized basis, only a fraction of IBM’s total $100 billion in revenue last year.

"The market has punished them probably because when you’ve promised something and you keep saying you’re going to do it and all of a sudden you change your mind, that obviously upsets a lot of people,” said Bob O'Donnell, chief analyst of TECHnalysis Research.

O’Donnell said IBM threw a bunch of bad news at investors, including cancellation of a share buyback, to get it all out of the way at once. Now, it has to prove it can build in new sectors.

"I think they’re going to have to get more aggressive at leading into the cloud business and that’s going to take some reassessment of expectations and realignment of resources from mainframe service to the more modern stuff," he said in an interview with CBC's The Exchange with Amanda Lang.

Rometty has been selling off underperforming operations in an effort to streamline the company.

Today IBM announced will pay $1.5 billion to Globalfoundries to take over its global semiconductor chip division.

The company took a $4.7 billion charge for the third quarter on the deal, which will involve making payments over the next three years to Santa Clara, Calif.-based Globalfoundries

Director of research John E. Kelly III said IBM will continue to invest in and expand its chip research. The deal allows the company to focus on big data, analytics and cloud computing, he said.

Exclusive deal with IBM

Privately held Globalfoundries will get IBM's global commercial semiconductor technology business, including intellectual property and technologies related to IBM Microelectronics.

It also gets IBM's semiconductor manufacturing operations and plants in East Fishkill, New York and Essex Junction, Vermont, as well as access to thousands of patents and IBM's commercial microelectronics business.

Under the agreement, Globalfoundries will become IBM's exclusive server processor semiconductor technology provider for 22, 14 and 10 nanometre semiconductors for the next 10 years. Globalfoundries was spun off from Advanced Micro Devices in 2009 to handle chip production.​

With files from the Associated Press