IBM’s CEO admits in letter to investors Big Blue didn’t meet expectations

Ginni Rometty, chief executive officer of IBM (NYSE: IBM) said the company fell short of expectations last year and must address its struggling hardware businesses.

“We must acknowledge that while 2013 was an important year of transformation, our performance did not meet our expectations,” Rometty said over the weekend in a letter to investors in the company’s annual report. “While we continue to remix to higher value, we must also address those parts of the business that are holding us back.”

IBM has struggled in a shift to the cloud era, where data and information are delivered online instead of being stored onsite. Falling demand for hardware and weak sales in growth markets have dragged down revenue for the last seven quarters, prompting Rometty to sell assets, fire and furlough workers, buy back shares and cut taxes to help meet profit goals.

IBM’s sales fell 5 percent last year, and the stock was the only decliner in the Dow Jones Industrial Average. That led top executives to forgo annual bonuses and shrink the company’s headcount for the first time in a decade.

Even as revenue has tumbled, Rometty reaffirmed IBM’s goal of $20 a share in adjusted earnings by 2015 — up from $11.67 in 2010, the letter said.

The CEO said the company will continue shifting its focus to cloud services and data analytics while making changes to its hardware products. The company agreed in January to sell most of its low-end server business for $2.3 billion to Lenovo Group Ltd.

After buying cloud provider SoftLayer Technologies Inc. last year for $2 billion, IBM is integrating existing hardware and data analytics with its services.

IBM will use its Power Systems servers to help deliver its Watson tool through the cloud, the company said last month. The company is spending $1 billion on building a new business group around the technology, which analyzes troves of information and answers questions in plain English.

This follows a $1.2 billion commitment to bolster SoftLayer’s cloud offerings by adding new data centers and an expansion of the services to lure new customers as it faces off with competitors like Amazon.com Inc.