IBM Revenues Hit By Hardware Decline

IBM delivered mixed third quarter earnings, with revenues down 4 percent and net income up 6 percent, led by high growth opportunities and dragged down by declining hardware sales.

IBM reported total revenues for the third-quarter of 2013 of $23.7 billion (£15bn), down 4 percent from the third-quarter of 2012. Third-quarter net income was $4.0 billion compared with $3.8 billion in the third-quarter of 2012.

Hardware troubles

Big Blue took a hard hit in hardware, where revenues from the Systems and Technology segment totaled $3.2 billion for the quarter, down 17 percent from the third-quarter of 2012. Although System z revenue grew 6 percent, total systems revenues decreased 19 percent, IBM said. Revenues from Power Systems were down 38 percent compared with the 2012 period. Revenues from System x were down 18 percent. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), increased 56 percent. Revenues from System Storage decreased 11 percent. And revenues from Microelectronics OEM increased 1 percent.

Meanwhile, IBM also suffered in its growth markets, which are typically strong for the company.

“In hardware, growth in System z mainframe was more than offset by declines in Power, System x and Storage,” said Mark Loughridge, IBM senior vice president and chief financial officer, in a call with analysts. “Two-thirds of the overall hardware decline was driven by the growth markets.”

Loughridge added that “From a geographic perspective, our challenge this quarter was in growth markets – where revenue was down 9 percent, or 5 percent at constant currency. Our performance in growth markets has historically outpaced major markets by eight to 10 points, but this quarter, for the first time, the growth markets trailed the majors.”

Ginni Rometty, IBM chairman, president and chief executive officer, in a statement, said, “In the third-quarter we continued to expand operating margins and increased earnings per share, but fell short on revenue. Where we had identified high growth opportunities and pursued them aggressively – cloud, mobile, business analytics, and security – we continued to show strong growth. This underscores our strategy to continuously transform the company to high value. We are taking action to improve execution in our growth markets unit and in the elements of our hardware businesses that are under performing. Given these actions, our strategic initiatives and the strength of our model, we are maintaining our view for the full year and remain confident in our ability to achieve at least $20 operating EPS [earnings per share] in 2015.”

China sales decline

Loughridge fought to back up this claim during the call, noting that “We never said the roadmap progression would be a straight line.” Loughridge also noted that IBM had “two major headwinds that hit us hard”. One is a $1 billion year-to-year profit decline in hardware and the other a $500 million impact from currency, he said.

However, IBM’s software and services business “has been moving down the field at the rate we’re looking for”, Loughridge said. He maintains that IBM is in line with its trajectory of reaching EPS of $20 by 2015 if the company can stabilise its hardware business.

China has been a particularly troublesome area for IBM this quarter.

“China was down 22,” Loughridge said. He said China typically accounts for at least 5 percent of IBM’s revenue and 40 percent of that is hardware.

“We experienced a slowdown in demand across the board, but most significantly in hardware which was down about 40 percent…,” Loughridge said. “While we had some execution problems during the third quarter, we were impacted by the process surrounding China’s development of a broad-based economic reform plan, which will be available mid-November. In the meantime, demand from state-owned enterprises and public sector has slowed significantly, as decision-making and procurement cycles lengthened. We believe the changes will take time to implement and do not expect demand in China to pick up until after first quarter of next year.”

In other segments, IBM’s Global Technology Services segment revenues decreased 4 percent to $9.5 billion and Global Business Services segment revenues were flat at $4.6 billion.

Software growth

Revenues from the company’s software segment were $5.8 billion, up 1 percent compared with the third-quarter of 2012. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Social Workforce Solutions and Rational products, were $3.7 billion, up 3 percent versus the third-quarter of 2012. Operating systems revenues of $576 million were down 4 percent (down 2 percent, adjusting for currency) compared with the prior-year quarter.

Revenues from the WebSphere family of software products were flat year over year. Information Management software revenues increased 2 percent. Revenues from Tivoli software increased 2 percent. Revenues from Social Workforce Solutions increased 14 percent, and Rational software increased 12 percent.

Overall, Loughridge was optimistic. “Across IBM, we delivered strong performance in our growth initiatives that address key market trends – Smarter Planet, business analytics, and cloud – leveraging both organic investments and acquisitions,” he said. “Our Smarter Planet solutions are up more than 20 percent through September, and business analytics is up 8 percent year to date. In cloud, we closed the acquisition of SoftLayer in July, which significantly improves our capabilities in public and hybrid cloud. For the first time, we delivered more than $1 billion of cloud revenue in a quarter, of which about $460 million is delivered as a cloud service. Through the first 3 quarters, our cloud revenue is up more than 70 percent year to year.”

However, Geoff Woollacott, a senior analyst at Technology Business Research, said, “IBM is not immune to the overarching disruptions to core revenue streams cloud technology accelerates.”

Woollacott added, “IBM also stated cloud revenue surpassed the $1 billion mark for the first time on a quarterly basis, with $460 million coming from “as-a-service” revenue streams. Reporting clarity will improve going forward both due to its strategic importance to IBM and due to the external concerns being raised by the SEC on the reporting metrics.”

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Originally published on eWeek.