http://www.nytimes.com/2014/10/21/business/amid-a-shift-in-strategy-ibm-reports-weak-earnings.html 2014-10-20 14:28:58 Amid a Shift in Strategy, IBM Reports Weak Earnings The chief executive called results disappointing as the company said it would pay $1.5 billion to shed its chip-making unit. === IBM In an interview earlier in 2014, Virginia Rometty, IBM’s chief executive, said this year would be a “rocky time” given the challenges. But the company’s third-quarter profit and revenue came in well below the forecasts of Wall Street analysts. The overall results were blurred by another step IBM announced on Monday, shedding its chip-making operations in a deal with Globalfoundries. The company took a $4.7 billion pretax charge against its third-quarter earnings, which were reported before the stock market opened on Monday. The charge includes writing down the value of the assets and a $1.5 billion cash payment to Globalfoundries, a large contract chip producer. With the charge for the chip sell-off, IBM reported net income of $18 million, or 2 cents a share. But the big one-time charge, for a move in line with IBM’s long-term strategy, is the sort of thing investors expect and often applaud. In trading before the market opened, IBM’s stock price was down almost 7 percent. The real weakness, however, was in the performance of IBM’s continuing businesses. The company’s operating profits for the quarter, excluding the one-time chip-related charge, fell 10 percent, to $3.68 a share. That was well below the average estimate of Wall Street analysts of $4.32 a share. Revenue for the quarter slipped 4 percent to $22.4 billion, a large shortfall from analysts’ consensus forecast of $23.4 billion. In a statement, Ms. Rometty said, “We are disappointed in our performance. We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry.” Ms. Rometty added that the businesses that IBM is betting on for future growth, including software and services that help businesses analyze vast amounts of data, as well as cloud computing, did well. But those gains were not enough to make up for the slowdown in IBM’s traditional hardware, software and services businesses in the quarter. IBM had been in negotiations with Globalfoundries for months. So the deal was expected, though the financial arrangements, including the size of the charge, were not known. Getting out of the chip-making business is part of IBM’s long-term strategy of steadily pulling back from businesses with low profit margins. In January, the company At the same time, IBM is making multibillion-dollar investments in services and businesses that promise higher profits, including its Watson artificial intelligence technology. IBM’s microelectronics business, analysts estimate, accounted for $2.5 billion in revenue last year and lost an estimated $500 million. Total IBM revenue last year was just under $100 billion. IBM has said it had no intention of abandoning the semiconductor business altogether. In July, it announced that it planned to invest $3 billion over the next five years in advanced semiconductor research and development. The company wants to invent new chip designs while handing over the production of chips to contract manufacturers like Globalfoundries. Globalfoundries was created in 2009 when Advanced Micro Devices spun out its manufacturing operations; it later acquired the chip factories of Chartered Semiconductor. Globalfoundries, based in Santa Clara, Calif., has manufacturing operations in Germany, Singapore and a new chip factory outside Albany, N.Y. Its principal shareholder is the investment arm of the government of Abu Dhabi.