IBM Reports 3Q Revenue Decline as Transformation Continues

By Darryl K. Taft  |  Posted 2015-10-19 Print this article Print
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"We are going through a significant transformation, and where we've been investing, we've been driving tremendous growth," said Martin Schroeter, IBM senior vice president and chief financial officer, during IBM's earnings call with analysts.

Meanwhile, IBM's Global Technology Services segment revenues were down 10 percent to $7.9 billion, while Big Blue's Global Business Services segment revenues fell 13 percent to $4.2 billion. Yet IBM's estimated services backlog as of Sept. 30 was $118 billion, up 1 percent year-to-year, adjusting for currency.

IBM reported that revenues from its software segment were $5.1 billion, down 10 percent from the third quarter of 2014. Revenues from IBM's key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $3.4 billion, down 7 percent year-to-year. Operating systems revenues of $0.4 billion were down 14 percent year-to-year.

Despite hardware taking a hit, IBM's mainframe business increased. IBM said revenues from the Systems Hardware segment totaled $1.5 billion for the quarter, down 39 percent year-to-year. However, revenues from z Systems mainframe server products increased 15 percent from the year-ago period. Total delivery of z Systems computing power, as measured in MIPS (millions of instructions per second), increased 18 percent.  Revenues from Power Systems fell 3 percent from the 2014 period. And revenues from System Storage decreased 19 percent.

"When tracking a company in transition, their legacy business initially will fall off faster than their new business can overcome," said Rob Enderle, principal analyst with the Enderle Group. "That is because the old business starts with a bigger base and the percentage drops have a larger impact.

"What you are looking for is whether the firm can demonstrate they can grow the new business aggressively and whether, with the current rate of change, they can continue to fund the transition," Enderle continued. "Both are evident here. IBM remains cash-positive; so they are at no risk of being unable to fund the transition and the new business is growing very strongly suggesting a crossover point within four or five years where the firm will be measured mostly on the new revenue [rather] than the old."

Enderle said he views IBM's third-quarter cloud revenue as "particularly impressive" at nearly $10 billion and 65 percent growth.

"In the end, the numbers show that IBM is plowing through the transition reasonably well, with some interesting surprises," he said. "Those surprises were strong mainframe growth, 15 percent—remember the mainframe was supposed to be dead in 1980—and an improved gross margin, thanks to the shift away from the old hardware-first model to mobile, analytics, security and social. Now we just need to see if they can sustain it."



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