International Business Machines Corp reported a marked slowdown in business in September and abandoned its 2015 operating earnings target on Monday, as weak client spending and a slumping software sector weighed down quarterly revenue.
IBM shares fell nearly 7 percent to a three-year low, a blow for legendary investor Warren Buffett whose Berkshire Hathaway Inc is its top shareholder. The decline shaved more than $13 billion off of IBM's market cap, which stood at $182 billion at the stock market close on Friday.
IBM was the main reason the Dow was down Monday, because of IBM's size and high share price. The Dow is what's known as a price-weighted stock index, which means more expensive stocks like IBM tend to have an out-sized impact on its movements. Without the effect of IBM's decline, the Dow would be up 73 points.
"We are disappointed in our performance," said Ginni Rometty, IBM chairman, president and chief executive officer. "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."
IBM, the world's largest technology services company, is struggling to keep up with shifts in the industry as hardware becomes increasingly commoditized. The company, once best known for mainframe computers, has been pivoting to higher-margin businesses such as security software and cloud services, but growth in those areas has failed to offset weakness elsewhere.
In a move to rid itself of one underperforming business, IBM also said on Monday it will hive off its loss-making semiconductor unit to contract chipmaker Globalfoundries Inc. In a sign of the unit's weakness, IBM is paying Globalfoundries $1.5 billion to take the unit over.
"Some of these fundamental shifts in the industry are happening faster than we planned," Rometty said on a call with analysts. "We are continuing to remix to higher value."
IBM is hardly the only technology company having a hard time keeping up with the shift to Internet-based software and storage systems. German software maker SAP SA cut its 2014 operating profit forecast on Monday, citing a faster-than-expected move to cloud-based software . Oracle Corp has grappled with similar issues.
IBM will divest low-performing businesses that will contribute almost $7 billion in revenue this year, and plans to continue getting out of those sectors, Rometty said.
Revenue from the company's cloud service unit, which allows businesses to access software and data remotely, grew more than 50 percent in the quarter, while mobile revenue doubled.
Still, they were not enough to offset weakness in servers and routers, as well as some software business lines.
An appreciating US currency, which lowers the value of foreign revenue as reported in dollars, also weighed on earnings and will have a significant impact on profits in the fourth quarter and in 2015, Chief Financial Officer Martin Schroeter said.
The company is also preparing to take a $300 million charge for "workforce restructuring," but did not specify how many employees would be affected.
IBM, which said it would announce a new operating earning per share target for 2015 in January, reported a 4 percent drop in third-quarter revenues as clients held back on spending in September.
"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)," FBR Capital Markets analyst Daniel Ives said.
Revenue fell to $22.4 billion in the quarter from $23.34 billion a year earlier. Analysts expected $23.37 billion, according to Thomson Reuters I/B/E/S.
Net profit from continuing operations dropped to $3.46 billion, or $3.46 per share, from $4.14 billion, or $3.77 per share in the same quarter last year.
On an adjusted basis, the company earned $3.68 per share, missing the average analyst estimate of $4.31 per share.
IBM shares fell were down $12.90 to $169.15 in afternoon trading on the New York Stock Exchange.
Buffett, whose Berkshire Hathaway holds a 7 percent stake in IBM, did not immediately return a call seeking comment.
The quiet trading on Wall Street came after a wild ride last week, when the Dow moved between triple-digit losses and triple-digit gains. Investors remain concerned that economic weakness in Europe could spread to the U.S. Many investors remain bullish on the U.S. stock market over the long term, especially considering how well the U.S. economy has been doing.
"The recent sell-off could get worse before it gets better. However, in our opinion, the current downturn is unlikely to develop into a more sustained correction or a break in the secular bull market we have experienced over the past five years," said Anne Symanovich, a senior investment research analyst at Wells Fargo, in a note to investors.
The calm can be seen in the VIX, Wall Street's so-called "fear index," which was down another 10 percent to 19, closer to its recent average of 15. The index rose as high as 30 last week.