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IBM's China-driven slump sparks executive shakeup

By Soham Chatterjee and Edwin Chan

(Reuters) - IBM Corp has reassigned the head of its growth markets unit, a source with knowledge of the move said, after a surprisingly steep drop in quarterly hardware sales in China prompted a 7 percent share slide on Thursday.

James Bramante's reassignment was first flagged during the company's conference call on Wednesday, when Chief Financial Officer Mark Loughridge said sales chief Bruno Di Leo would be taking over at the unit, which oversees growth markets for the company.

"They know how to get this done," Loughridge told analysts on the call, referring to Di Leo and his team. "They helped build this to begin with."

IBM declined to comment, and the source did not say where Bramante would be reassigned.

The shakeup comes amid concerns that International Business Machines Corp, which is moving steadily into higher-margin businesses such as software and cloud computing, is struggling to sustain growth through its emerging markets business.

The company reported a worse-than-expected 4 percent dip in third-quarter revenue, its sixth straight quarterly decline.

Much of that came from a 17 percent slide in overall hardware. Profitability in that business has declined by $1 billion so far this year.

At least eight brokerages cut their price targets on the stock by as much as 9.5 percent to between $160 and $220, while analysts at UBS Investment Research downgraded the stock to "neutral" from "buy.

The latest quarterly disappointment deals another blow to Chairman and CEO Ginni Rometty in her first year as head of the board. Including Thursday's plunge, IBM's stock has dropped 15 percent since she stepped up as chairman compared with the S&P 500's 18 percent gain.

"We are concerned about future earnings power. IBM has been successful in multiple computing waves in the past but we believe the execution issues combined with the weak IT spending environment will hold back any potential revenue growth," UBS analysts said in a note to clients.

Loughridge blamed much of the revenue decline on China, which accounts for about 5 percent of IBM's business. About 40 percent of that business is hardware. He said the country was working on a nationwide economic reform plan ahead of a major government plenary session in November, which depressed sales.

Much of China's corporate sector is dominated by the state in a centrally planned economy, and government enterprises often hold back on spending in the run-up to major nationwide policy changes.

But he also admitted that about half of the decline was due to "execution" issues, noting that Di Leo's appointment was aimed at addressing a "leadership differential."

SALES PANGS

IBM shares closed down 6.4 percent at $174.83 on the New York Stock Exchange after touching a two-year low of $172.57. That marked their steepest one-day slide since April 19, also triggered by disappointing sales.

The world's largest technology services company reiterated its full-year profit outlook, but analysts raised doubts about the company's ability to convert services backlog to revenue. IBM has reported a decline in revenue for six straight quarters.

"Software has been the growth engine for IBM and has been one of the key reasons investors held the stock. However, it appears that the engine may have stalled and no longer can outgrow the broader software market," J.P. Morgan analysts said in a note.

IBM, which sold its personal computer business to Lenovo Group Ltd in 2005, has been shifting to a more software-focused business.

Talks with Lenovo earlier this year about selling off IBM's low-end server business failed.

(Reporting by Soham Chatterjee and Edwin Chan; Editing by Sriraj Kalluvila, Maju Samuel. Editing by Andre Grenon)

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