IBM Q1 Disappoints As Poor Deal Closures Bite

Tech bellwether IBM has done a rare thing after it failed to meet Wall Street estimates for its first quarter 2013 earnings.

Indeed, Big Blue’s net income came in at $3 billion (£2bn) – down 1 percent from the same period a year ago. Revenues meanwhile for the quarter were $23.4 billion (£15.3bn), down 5 percent from the same period last year and short of analyst estimates of $24.7 billion (£16.1bn).

Deal Closing

“In the first quarter, we grew operating net income, earnings per share and expanded operating margins but we did not achieve all of our goals in the period,” said Ginni Rometty, IBM chairman, president and chief executive officer, in a statement. “Despite a solid start and good client demand we did not close a number of software and mainframe transactions that have moved into the second quarter. The services business performed as expected with strong profit growth and significant new business in the quarter.”

In a call with analysts to discuss IBM’s Q1 results, Mark Loughridge, senior vice president and chief financial officer for finance and enterprise transformation at IBM, said, “This quarter certainly didn’t close the way it started. We had solid profit performance in January, but as the quarter ended, hundreds of millions of dollars of very profitable software and System z mainframe deals fell short of the goal line. This impacted the first quarter close, but the rollover of these deals positions us for a strong start in our software and mainframe businesses in the second quarter.”

Analysts indicate that IBM is suffering from economic uncertainty in the US and abroad and some indicate the company’s standing as a bellwether could impact other tech stocks. However, Loughridge projected confidence in IBM’s ability to weather turbulent times by focusing on higher value solutions and said the company is “going to roll up our sleeves to get this back on track.”

IBM said revenues from its software segment were flat at $5.6 billion (£3.7bn) compared with the first quarter of 2012. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Social Workforce Solutions (formerly Lotus) and Rational products, were $3.5 billion (£2.3bn), up 1 percent versus the first quarter of 2012. Operating systems revenues of $578 million (£378m) were down 2 percent compared with the prior-year quarter. Revenues from the WebSphere family of software products increased 6 percent year over year. Information Management software revenues decreased 2 percent. Revenues from Tivoli software increased 1 percent, while revenues from Social Workforce Solutions software increased 8 percent, and Rational software decreased 2 percent.

“The task for IBM Software through 2013 will be to shift gears to drive revenue and profit growth to deliver on 2015 financial goals,” said Matthew Casey, a software analyst with Technology Business Research, in a report on the IBM Q1 earnings. “Leading growth during 1Q13 was IBM’s Social Workforce Solutions business (formerly Lotus) which grew 8 percent year-to-year. Although growth initiatives including business analytics, cloud, Smarter Planet and growth markets will be key focal points to achieve growth, underlying trends like software-defined environments, open-source based platforms, and targeted strategies with line-of-business focused solutions will be essential to the success of these initiatives.”

Looking Forward

“In software, we had good performance in several key areas such as smarter commerce, social business, security, and storage management, but our growth rate was impacted by the inability to close some large transactions at the end of the quarter,” Loughridge said. “In Systems and Technology, while we’re delivering good performance in System z mainframe despite the slipped deals, and in our PureSystems offerings, weakness in Power, System x and storage resulted in overall declines.”

Revenues from IBM’s Systems and Technology segment totalled $3.1 billion (£2bn) for the quarter, down 17 percent from the first quarter of 2012. Excluding Retail Store Solutions (RSS), revenues were down 14 percent. Total systems revenues, excluding RSS, decreased 13 percent. Revenues from System z mainframe server products increased 7 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), increased 27 percent. However, revenues from Power Systems were down 32 percent compared with the 2012 period. Revenues from System x were down 9 percent. Revenues from System Storage decreased 11 percent. And revenues from Microelectronics OEM decreased 16 percent.

Meanwhile, IBM’s Global Technology Services segment revenues decreased 4 percent to $9.6 billion (£6.3bn), while Global Business Services segment revenues were down 3 percent to $4.5 billion (£2.9bn).

“Looking ahead, in addition to closing those transactions, we expect to benefit from investments we are making in our growth initiatives and from the actions we are taking to improve under-performing parts of the business,” Rometty said in a statement. “We remain confident in this model of continuous transformation and in our ability to deliver our full-year 2013 operating earnings per share expectation of at least $16.70.”

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Originally published on eWeek.