While IBM beat Wall Street's earnings forecast for its fiscal fourth quarter on Tuesday, the vendor missed revenue expectations due to weak sales of servers, storage and other hardware.
For the quarter ended Dec. 31, IBM reported a profit of $6.2 billion, or $5.73 per share, compared to $5.8 billion and $5.13 per share during last year's fourth quarter. Excluding items, IBM earned $6.13 per share, while Wall Street analysts were expecting $5.99 per share.
However, IBM's revenue dropped from $29.30 billion a year ago to $27.70 billion, marking the fourth straight quarterly sales decline for the Armonk, N.Y.-based vendor. IBM's System and Technology Group, which sells mainframes, servers, storage and other hardware, saw revenue drop more than 26 percent to $4.26 billion during the quarter.
IBM shares dropped more than 3 percent to $182.30 in Tuesday after-hours trading.
Ginni Rometty, IBM chairman, president and CEO, said in a statement that she and her senior staff will be forgoing their annual bonuses for 2013 as a result of the company's subpar performance.
In a conference call with investors, IBM CFO Martin Schroeter acknowledged the existence of "business model issues in parts of our hardware business." He said IBM is planning job cuts in the STG unit, but did not offer specific numbers.
IBM said revenue from System Z mainframe server products fell 37 percent compared with last year's quarter, while Power Systems decreased 31 percent, System x sales dropped 16 percent and storage hardware sales dipped 13 percent.
IBM did not address any rumors that the company is shopping around its underperforming server business. On Monday reports surfaced that IBM was in talks with both Lenovo and Dell to sell its x86 server group.
On the positive side, IBM's software unit saw revenue rise 3 percent year-over-year to $8.1 billion, driven by healthy sales of its WebSphere, Information Management, Tivoli, Social Workforce Solutions, and Rational products.
IBM also said its cloud revenue rose 69 percent to $4.4 billion. IBM said it expects to see cloud revenue continue to replace hardware revenue as strategic investments, including last week's $1.2 billion plan to expand its SoftLayer data centers around the world, began to pay off.
IBM said a $1 billion investment in commercializing its Watson supercomputer technology would also help offset hardware losses in future quarters.
IBM said it expects to earn at least $17 per share in its fiscal 2014, while Wall Street analysts are expecting $18 per share. IBM said it's still on track to hit its target earnings of $20 a share by 2015.