International Business Machines (IBM - Free Report) has come up with a restructuring plan which includes massive layoff. The company reportedly announced plans to terminate around 1,700 employees from several of its units in different locations.
IBM on Friday said that the restructuring was necessary in order to focus more on high-value segments of the IT market. It further added that it will employ more staff in newer and key areas to offer higher value service to clients.
Notably, IBM has around 340,000 employees and the job cut will effect around 0.5% of its workforce.
IBM’s Restructuring Timeline
IBM has been focused on streamlining operations by moving away from traditional businesses to newer (read lucrative) business avenues like cloud and data analytics. Though IBM’s Strategic Imperatives are performing well but these are not enough to make up for the weakness in traditional business.
To this end, it eliminated few jobs in May 2016 most cut coming at the New York City; Poughkeepsie, NY; Research Triangle Park campus, NC; and Boulder, CO. In March 2016, the company slashed 5,000 jobs.
In September 2018, the company came under fire for allegations of retrenching older employees in a bid to replace them with a younger workforce. In fact, according to the sources, since 2012, IBM has laid off 20,000 employees who were over the age of 40.
Impact of the Restructuring Processes
Currency fluctuations continue to wreak havoc on IBM’s first-quarter 2019 results as a considerable part of its revenues is generated from international markets. Revenues during the quarter came in at $18.18 billion, which missed the Zacks Consensus Estimate of $18.52 billion and declined 4.7% on a year-over-year basis.
The year-over-year revenue decline can primarily be attributed to currency fluctuation and headwinds from IBM Z product cycle. Further, softness in the emerging markets of Asia Pacific affected the top-line performance.
Intensifying competition in the cloud computing & data analytics arena is adding to woes. However, we believe that despite currency headwinds and intensifying competition, we expect the restructuring to positively impact IBM’s overall results going forward.
During the quarter, IBM combined Cloud business and Cognitive Software in one segment. Further, the company merged security services with security software. We believe the company’s streamlining activities have positively impacted margins. In the first-quarter 2019, non-GAAP gross margin increased 100 bps from the year-ago quarter and came in at 44.7%.
IBMs efforts to improve financial position encourage us. Moreover, the company’s focus on expanding product offerings for customers bodes well for the long term. Though declining revenues remain a key concern, but the company’s improving position in the hosted cloud, security and analytics bodes well for investors.
Moreover, IBM’s deal to acquire Red Hat, Inc. is anticipated to aid IBM in reviving its fortunes and pave the way for a robust and secure hybrid cloud infrastructure. Further, Red Hat has around 13,360 employees and we believe that post competition of the acquisition IBM may fill most of the vacant positions with some of the Red Hat employees.
Zacks Rank & Key Picks
IBM currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader technology sector are Match Group, Inc. (MTCH - Free Report) and Universal Display Corporation (OLED - Free Report) , each flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Match Group and Universal Display have a long-term earnings growth rate of 15.2% and 30%, respectively.
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